7 D-165 257 A REVIEW OF THE DEBATE CONCERNING THE REAGAN
1/2ADMINISTRATION'S INCREASE IN DEFENSE SPENDING(AJ) NAVAL
POSTGRADUATE SCHOOL MONTEREY CA H W COUCH DEC 85UNCLASSIFIED F/G 5/1 L
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I-"
THESIS EC) A REVIEW OF THE DEBATE CONCERNING THECDREAGAN ADMINISTRATION'S INCREASEI I IN DEFENSE SPENDINGC-Ji
by
Howard William Couch Jr.
: December 1985
Thesis Advisor Jerry L. McCaffery
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11 TITLE (Include Security Classification)
A REVIEW OF THE DEBATE CONCERING THE REAGAN ADMINISTRATION'S INCREASE INDEFENSE SPENDING
12 PERSONAL AUTHOR(S)Couch, Howard W. Jr.
13a TYPE OF REPORT 13b. TIME COVERED 14. DATE OF REPORT (Year, Month, Day) 15. PAGE COUNTMaster's Thesis FROM TO 1985, December 102
16 SUPPLEMENTARY NOTATION
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"9 ABSTRACT (Continue on reverse if necessary and identify by block number)
The overall purpose of this thesis is to examine the debate concerningthe consequences of President Reagan's defense buildup program on the U.S.economy and its relationship to the Federal debt. The research methodologyemployed consists of performing a comprehensive examination of the litera-ture compared with available economic data for the period under study. Theeffects of the rapid buildup on the issues of inflation, employment, longrun growth and the growing Federal debt are examined. The study includes adiscussion of the present budget balancing efforts requiring a "fair share"reduction in defense spending to assist in reducing the Federal debt. Thestudy's main conclusions are that the increased defense expenditures didnot burden the economy as predicted by many defense analysts. Additionally,budgetary outlay compo3ition data show that the current Federal debt is
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#19 - ABSTRACT - (CONTINUED)
primarily a result of the growth in uncontrollable spendingfor social programs and not the recent increases inexpenditures for national defense.
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A Review of the Debate Concerningthe Reagan Administration'sIncrease in Defense Spending
by
Howard William Couch, Jr.Lieutenant Commander, United States Navy
B.S., University of Tennessee, 1975
Accession For
Submitted in partial fulfillment of the! I", T 1--3requirements for the degree of .. A .
MASTER OF SCIENCE IN MANAGEMENT
from the
NAVAL POSTGRADUATE SCHOOLDecember 1985
!A-I.
Author:H(?qr W. Cou Jr.S----
Approved by:Jerr L. McCa ery Tho !rls Advisor
SD.E Melchar, Second Reader
Willis R. Greer, Jr., Chaikman,Department of Administrative Sciences
Dean of Information an cy Sciences
3
N,.
ABSTRACT
The overall purpose of this thesis is to examine the debate
concerning the consequences of President Reagan's defense
buildup program on the U.S. economy and its relationship to
the Federal debt. The research methodology employed consists
of performing a comprehensive examination of the literature
compared with available economic data for the period under
study. The effects of the rapid buildup on the issues of
inflation, employment, long run growth and the growing Federal
debt are examined. The study includes a discussion of the
present budget balancing efforts requiring a Ofair share"
reduction in defense spending to assist in reducing the
Federal debt. The study's main conclusions are that the in-
creased defense expenditures did not burden the economy as
predicted by many defense analysts. Additionally, budgetary
outlay composition data show that the current Federal debt is
primarily a result of the growth in uncontrollable spending for
social programs and not the recent increases in expenditures
for national defense.
44
- , ,, , , ,. , - ,,, - k - .. . ...- , ... . . . . . ,.-. . . . -.- .. ,..- .. ,-. ,. -. . - -.4. .-.
TABLE OF CONTENTS
I. INTRODUCTION 8-------------------------------------8
A. BACKGROUND- ----------------------------------- 8
B. PURPOSE AND OBJECTIVE ------------------------ 12
C. RESEARCH METHODOLOGY ------------------------- 12
D. ORGANIZATION OF THE THESIS ------------------- 12
II. UNITED STATES DEFENSE POSTURE IN PERSPECTIVE ----- 14
A. INTRODUCTION --------------------------------- 14
B. DEFENSE DEPARTMENT BUDGET FORMULATION -------- 14
C. PAST EXPENDITURES FOR NATIONAL DEFENSE ------- 18
1. General ---------------------------------- 18
2. Military Spending from Kennedy to Carter - 22
3. Defense Outlays as a Percent of GNP ------ 27
D. CHALLENGES TO NATIONAL SECURITY -------------- 28
1. General ---------------------------------- 28
2. Soviet Union Defense Expenditures -------- 31
r. 3. Soviet Military Buildup and Force
Modernization ---------------------------- 33
E. REAGAN'S REARMAMENT PLAN --------------------- 35
F. SUMMARY -------------------------------------- 38
III. DEFENSE EXPENDITURES AND THE U.S. ECONOMY -------- 40
A. INTRODUCTION --------------------------------- 40
* B. THE ISSUE OF INFLATION ----------------------- 41
C. THE ISSUE OF EMPLOYMENT ---------------------- 48
v~. 5
*-- *' jV VV'
D. THE ISSUE OF LONG RUN GROWTH ------------------ 56
E. SUMMARY --------------------------------------- 61
IV. DEFENSE SPENDING AND BUDGET DEFICITS -------------- 63
A. INTRODUCTION ---------------------------------- 63
B. FEDERAL DEFICIT GROWTH ------------------------ 65
C. DEFICITS AND ECONOMIC CONSEQUENCES ------------ 71
D. FEDERAL BUDGETARY OUTLAYS --------------------- 74
1. General ----------------------------------- 74
2. Budget Outlay Controllability ------------- 76
3. Trends in Defense and Non-defense Outlays - 80
SE. THE CALL FOR DEFENSE CUTS TO REDUCE DEFICITS-- 84
0 F. SUMMARY --------------------------------------- 87
V. CONCLUSION ---------------------------------------- 88
A. INTRODUCTION ---------------------------------- 88
B. GENERAL CONCLUSIONS --------------------------- 88
C. RECOMMENDATIONS OF AREAS FOR FUTURE RESEARCH -- 90
D. SUMMARY --------------------------------------- 91
LIST OF REFERENCES -------------------------------------- 93
INITIAL DISTRIBUTION LIST i-------------------------------101
[, .'6
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4,,,, .. _ + . Vi ', ;,. +., u . . . .. .,', * .. **,. *' - .- , * ', , ., - .. . - - .,.- . , .*. ,,4. , .' .- .-. ' ,. -". -L '. ' .- "n
LIST OF TABLES
1. DEFENSE BUDGET TRENDS; BUDGET AUTHORITY AND OUTLAYS - 20
2. DEFENSE OUTLAYS AS A PERCENT OF TOTAL BUDGETOUTLAYS --------------------------------------------- 21
3. DEFENSE OUTLAYS AS A PERCENT OF GNP ----------------- 29
4. DEFENSE BUDGET AUTHORITY ---------------------------- 37
5. ACCELERATION OF INFLATION DURING PREVIOUSMILITARY BUILDUPS ----------------------------------- 43
6. UNEMPLOYMENT OF COMPUTER SPECIALISTS, SCIENTISTSAND ENGINEERS --------------------------------------- 52
7. UNEMPLOYMENT OF CRAFT WORKERS, BY TYPE OF WORKER ---- 54
8. PRODUCTIVITY; BUSINESS AND MANUFACTURING SECTORS ---- 60
9. REVENUES, OUTLAYS, DEFICITS, AND DEBT HELD BY THEPUBLIC (IN BILLIONS OF DOLLARS) --------------------- 67
10. REVENUES, OUTLAYS, DEFICITS, AND DEBT HELD BY THEPUBLIC (AS A PERCENT OF GNP)- ------------------------ 6-8....
6-
11. CONTROLLABILITY OF BUDGET OUTLAYS ------------------- 78
12. DEFENSE AND NON-DEFENSE OUTLAY TRENDS --------------- 81
'4. 7o.-
4.-.
.
.4.
I. INTRODUCTION
A. BACKGROUND
The year 1980 was one of perceived national security
crisis by the American public. The country had experienced a
series of defense and foreign policy shocks. The Iranian
revolutionaries held fifty Americans captive in the U.S.
embassy in Teheran; Americans were witness to the Soviet
invasion of Afghanistan on the nightly news; Soviet combat
troops were discovered in Cuba; The ratification of the SALT
II treaty, designed to limit the strategic arsenals between
the United States and the Soviet Union had been postponed by
Congress and the Carter administration. Moreover, it was an
election year and the republicans were advocating significant
increases in annual defense expenditures for the coming years.
[Ref. 1]
The changing mood of America concerning the adequacy of
U.S. defense spending was further reflected by various
opinion polls conducted during this period [Ref. 2]. NBC
News/Associated Press (AP) surveys showed that in the early
months of 1980 public support for increased defense spending
ranged from 55 percent to 74 percent, while support for less
defense spending ranged from 5 percent to 13 percent. In
contrast, the same poll conducted in 1978 found that only 26
percent wanted defense increases, while a majority of 51
8
percent wanted decreases. Other polls such as those conducted
by the highly respected National Opinion Research Center
reported in 1980, that of those polled, 60 percent felt that
too little was being spent on national defense. In 1978, 29
percent said too little was being spent and in 1973, only 12
percent of the respondents felt that the United States was
spending too little on defense.
The election of Ronald Reagan in 1980 and his subsequent
reelection in 1984, provided the mandate to restore America's
defenses. As President, Ronald Reagan embarked the United
States on the largest military rearmament plan in peace-time
history. The ensuing debate over the rapid growth in defense
spending reached the highest levels among leading economists
Aand policymakers concerning the role that increased defense
spending has on the economy, social program expenditures and
the federal deficits. Indeed, in March of 1985, with the
Reagan buildup well underway but far from complete, a Gallup
Poll reported that the winds of public opinion had changed once
again [Ref. 3]. The poll reported that 46 percent of those
polled felt that there was too much being spent for defense.
The same poll reported that only 11 percent felt that too
.. little was being spent for defense. Based upon Gallup Polls,
-I public support for reduced defense spending was at its highest
point since 1971, when 50 percent felt that it was excessive.
"" Debates over defense spending are not unique to recent
times; economists have long debated its economic consequences.
,I9
.Ini.
The early economist, Adam Smith, presented the following in
his famous book, The Wealth of Nations:
The whole army and navy, are unproductive labourers.They are the servants of the public, and are maintainedby a part of the annual produce of the industry of otherpeople. Their service, how honorable, how useful, or hownecessary soever, produce nothing for which an equalquantity of services can afterwards be procured. [Ref. 4]
President Truman proclaimed in 1948, at a time when the
United States undertook what was then an unprecedented level
of defense spending for peacetime, that the "country could not
go on spending $14 to $15 billion a year for defense" [Ref.
51. The ensuing debate concerning the Reagan administration's
defense buildup broadly encompasses two main issues. One is
the ability of the United States economy to absorb the adminis-
tration's rapid defense buildup without creating inflationary
pressures and reduced productivity. The other is to what ex-
tend the nation's resources should be devoted to national
security compared with other spending priorities.
Respected economists Henry Kaufman of the prestigious Wall
Street investment firm of Saloman Brothers [Ref. 6) and Lester
Thurow of the Massachusetts Institute of Technology [Ref. 7]
have warned that the buildup may have deleterious effects on
productivity and inflation. Lester Thurow suggests that the
proposed buildup would drain critical resources from civilian
production, thereby undermining productivity. Additionally,
Charles Schultze, former chairman of the Council of Economic
Advisors, explains that the proposed buildup may be too rapid,
10
I'
risking bottlenecks and large cost overruns [Ref. 8]. During
a Senate floor debate, September 18, 1979, Senator Edmund
Muskie [Ref. 91 opposed the proposed increases in defense
spending levels, citing the inflationary pressures placed upon
the economy as the greatest threat to the nation's national
security, not the condition of the defense establishment.
Conversely, there were those who disagreed with the pro-
posed negative economic effects of the buildup. In a state-
ment delivered by the then chairman of the Council of Economic
Advisors in October 1981, Murray L. Weidenbaum suggested that
the problems with bottlenecks and inflation associated with
past military buildups would not plague the proposed buildup,
for "the expansion of defense production is not an unplanned
surprise, but rather a gradual planned buildup over several
years" [Ref. 10]. The Annual Report to the Congress for
Fiscal Year 1983 includes a statement by the Secretary of
Defense, Casper Weinberger stating "fears that the defense
budget of this Administration will strain the economy are
unfounded" [Ref. 111. He noted that although defense spending
commanded a much higher share of the GNP in the 1950s and
1960s the inflation rates averaged much lower than in recent
years. A Congressional Budget Office study [Ref. 12] also
reported in February 1983, "the Administration's proposed de-
fense buildup should neither rekindle nor stunt employment
growth over the next few years."
g- 1
"9 ' % ' '' 4 ' " . ' ' . ° - ' o '"""L '°
" . " . " " ' " -. ' - " ,." .
B. PURPOSE AND OBJECTIVE
The debate over the consequences of the pace and scale
of President Reagan's rearmament plan has received extensive
coverage, however much of the information has been contra-
dictory and perhaps even misleading. The intent of this thesis
is to examine the issues using available data for the purpose
of gaining a better understanding of the effect of defense
spending increases on the economy and federal deficits.
Included in the study of defense spending and the federal
budget deficits will be a review of the present budget
balancing efforts requiring a "fair share" of defense budget
reductions to assist in reducing the Federal debt.
C. RESEARCH METHODOLOGY
The research methodology will consist of performing a
comprehensive examination of the literature and comparisons
with available economic data concerning the effects of
increased defense spending on the issues of inflation,
employment, long run growth and the growing federal budget
deficit.
D. ORGANIZATION OF THE THESIS
Chapter II is an overview of the United States defense
posture in perspective. This chapter will begin with a brief
description of the Defense Department budget formulation
process followed by a review of U.S. defense spending levels
from the Kennedy to Carter years. Following this discussion,
will be a review of current challenges to the Nation's
12
" -L' !
national security, focusing specifically on the defense
spending levels of the Soviet Union and of the Soviet's
military buildup and force modernization. The chapter closes
with a presentation of President Reagan's rearmament plan.
Chapter III examines the impact of defense expenditures on
the U.S. economy. The issues of inflation, employment and
long run growth as affected by rapid increases in defense
spending will be examined.
Chapter IV will present a discussion of defense spending
and its relationship to budget deficits. The chapter will
begin with a review of Federal deficit growth and the economic
consequences resulting from persistent large budget deficits.
The chapter will continue with a description of budgetary
outlay trends as influenced by their degree of controllability.
The issue of the "fair share" philosophy of defense cuts in
the name of budget reduction will also be presented.
Chapter V presents the conclusions and recommendations for
areas of possible future study.
13
U
II. UNITED STATES DEFENSE POSTURE IN PERSPECTIVE
A. INTRODUCTION
In order to gain a better appreciation and understanding
of the requirement for defense spending increases in the 1980's,
and to put into perspective the debate concerning the pace
and scale of President Reagan's rearmament plan, Chapter II
will present a historical overview of the United States
defense posture.
This chapter will begin with a brief review of the DoD
budget formulation process from the establishment of the
Department of Defense to present times. Related to the budget
determination process will follow an examination of past U.S.
defense spending levels concerning the years from the Kennedy
Administration to the Carter Administration. Following this
discussion, Chapter II will continue with a description of
challenges to our national security, specifically the defense
spending levels of the Soviet Union as compared to the United
States. Included in this discussion will be the buildup and
force modernization of the Soviet military forces. The chap-
ter will then conclude with a discussion of President Reagan's
rearmament plan.
B. DOD BUDGET FORMULATION
The evolution of the defense budget formulation prczess
since the founding of the defense department in 1947 has
14
included many revisions to the budgetary process as well as
substantial changes to the roles of the major players (i.e.,
OMB, OSD, JCS and the Services) involved with the establish-
ment of defense spending levels.
The changes experienced since 1947 have been characterized
by Puritano and Korb [Ref. 13] as an inevitable and healthy
4, tension between centralization and decentralization. Puritano
and Korb describe the decentralization pole as existing from
1957 to 1961 in which DoD received a specified budget ceiling
(either a fixed one third share of the federal budget under
President Truman, or a maximum of 10 percent of GNP under
President Eisenhower) within which the Secretary of Defense
allocated shares to the services. Except for the centralized
determination of the total spending level, virtually all other
internal programmatic and budgetary responsibilities were
decentralized to the services. During this period defense
spending levels depended largely on the desires of the Presi-
dent and his Secretary of Defense. Since the style of defense
policymaking depended largely on the wishes of the President
and the Secretary of Defense, the permanent bureaucracy was
discouraged from trying to reorganize itself to produce a
more unified defense policy based on national security needs
[Ref. 141. In a statement to the Senate Subcommittee on
National Policy Machinery in 1960, former Chief of Staff,
U.S. Army, General Maxwell Taylor stated:
the budget ceilings, often set with little knowledgeof their strategic implications, controlled the growth,
15
%AL
direction, and evolution of the armed forces and gaveeconomic and budgetary factors an overriding say indetermining military posture. [Ref. 15]
It was against this background that the budgetary process
was radically revised when Mr. McNamara became Secretary of
Defense in 1961 and implemented his planning, programming and
budgeting system, better known as PPBS. With the introduction
of PPBS the contrasting pole of centralization was firmly
established and would remain so from 1961 to 1969 [Ref. 161.
During this period with PPBS as his principal tool, Secretary
McNamara exercised almost total central control over the
process. The services lost control over their internal budget
15, process and merely executed the detailed programmatic guidance
as laid down by the Secretary.
The PPBS system contrasts with the traditional budgeting
process which preceded it from 1947 to 1961 in two different
ways. First, the focus of PPBS is more on objectives and
purposes and the long term alternative means for achieving
- them, placing less emphazis on seeking annual incremental
improvements to the existing budget base. Secondly, by bridging
together planning and budgeting by means of programming, avail-
able resources are distributed equitably among the many com-
peting programs. The system can be summarized in a few words.
Based on the anticipated threat, a strategy is developed.
Requirements of the strategy are then estimated and programs
are developed to package and execute the strategy. The last
step involves budgeting for the cost of the approved programs.
[Ref. 171
16
Although modified over the years by a series of reactions
to the Administration in office, PPBS continues to be the
framework for making resource decisions in the Department of
Defense. In the Nixon-Ford administrations, Secretary of
Defense Laird relaxed the centralized control of the process,
and programs were developed by the services within guidelines
as set forth by OSD. The Carter years with a very strong
Secretary of Defense in Mr. Harold Brown, witnessed a reversal
in the trend as initiated by Secretary Laird During this
period power and authority diminished for the services and the
secretaries and OSD regained a much greater programmatic role.
[Ref. 181 The Reagan Administration through Secretary of
Defense Weinberger has changed the management style once again
[Ref. 19] in the other direction toward controlled decentrali-
zation with the assignment of more responsibility to the
service Secretaries, and greatly reducing the PPBS paperwork
requirements that have built up over the years.
The quality of decisions concerning the formulation of the
defense budget depends upon how well the leadership in DoD
uses the PPBS process to develop defense programs that conform
to the realities of the international environment. In a study
of the Defense Department budget formulation process, Anthony
and Herzlinger [Ref. 20] suggested:
It would be incorrect to conclude that the budget wasthe result of a completely scientific, rational analy-sis. It would be equally incorrect to conclude thatthe budget was a slap-dash set of numbers that had noanalytical underpinnings. The correct impression issomewhere in between. Much of the budget is based on
17
S4
sound analysis of data, and the people who make theseanalyses, both in OSD and in the Services, are amongthe most highly skilled and hardest working in the govern-ment. But for many of the issues, the data are simplynot solid enough to permit a good analysis, and thesedecisions depend on judgement and on a process of nego-
.4 tiation. This may be unscientific, but it is the waylife is.
In studying the budget formulation process of the Defense
Department, one must keep in mind that if a President or the
Congress is so minded and has the support of the public, major
defense policy decisions can be taken by the Executive and/
or Legislative branch despite the serious doubts and reserva-
tions as expressed by the top leadership of the Armed Services.
C. EXPENDITURES FOR NATIONAL DEFENSE
1. General
A review of defense funding levels for the period of
1960 to 1980 reveals that despite a significant level of
growth in federal spending, there has been a dramatic shift
from defense to non-defense spending. Although this time
frame is marked by great year to year fluctuations, there
exists an overall downward trend in the allocation of re-
sources devoted to the national security of the United States.
The Pentagon's budgets appear to be more a function of national
opinion than of challenges to national security. As a top
decision-maker and former assistant to the Secretary of
Defense, W.S. Thompson [Ref. 211 wrote, "Policymakers had let
our defenses slide, owing to the growing demands for Great
Society Programs and to the escalating antiwar movement."
18
The terms budget authority and budget outlays as used
in Tables 1 and 2 to represent budgetary trends are defined
respectively by Collender [Ref. 22] as:
Budget Authority: The authority granted to a federalagency in an appropriations bill to enter into commit-ments that result in immediate or future spendings.In most cases budget authority is not the amount ofmoney an agency or department actually will spend duringa fiscal year but merely the upper limit on the amountof new spending commitments it can make.Budget outlays: The actual amount of dollars spent fora particular activity. The total results from both newbudget authority provided this year and from unexpectedbalances of budget authority provided in previous years.
Table 1 is presented in constant fiscal year 1983
dollars instead of current dollars and shows that defense
budget authority increased moderately during the early years
of 1960, decreased in 1964 and 1965 and increased rapidly from
1966 to 1968. Then for the next seven budgets, it fell every
year. The years 1976 to 1980 witnessed an increase of only
0.7 percent. In real percentage terms defense budget authority
increased only 7.4 percent from 1960 to 1980.
Table 2 is presented in constant fiscal year 1972
dollars instead of current dollars and presents defense outlays
as a percent of total federal budget outlays. A study of
defense outlays from this viewpoint clearly discloses the shift
from defense to non-defense spending. In 1960, defense out-
lays as a percent of total outlays were 54.7 percent. Twenty
years later that percentage had declined by 60 percent result-
ing in 1980 defense outlays of only 21.9 percent of total
federal budget outlays.
19
-..',. i " " - - - ..- - - ' ' ° ' ' ' ' " " ' . . " " " -' . ,,, , '' " . . . ..
TABLE 1
DEFENSE BUDGET TRENDS: BUDGET AUTHORITY AND OUTLAYS(BILLIONS OF FY 1983 CONSTANT DOLLARS)
DOD BUDGET PERCENT DEFENSE PERCENT
FY AUTHORITY CHANGE OUTLAYS CHANGE
1959 170.9 165.4
1960 166.0 -2.8 164.3 -0.7
1961 165.5 -0.3 166.9 1.6
1962 188.5 13.9 179.6 7.7
1963 191.8 1.7 182.6 1.6V..-
1964 184.6 -3.7 181.6 -0.6
1965 177.0 -4.1 165.6 -8.8
1966 213.1 20.4 183.2 10.7
1967 232.3 9.0 216.1 18.0
1968 235.4 1.3 236.0 9.2
1969 226.5 -3.8 229.6 -2.7
1970 204.4 -9.7 211.6 -7.8
1971 183.8 -10.1 191.9 -9.3
1972 178.9 -2.7 179.4 -6.5
1973 170.8 -4.5 164.0 -8.6t -a
1974 165.2 -3.3 160.5 -2.1
1975 161.5 -2.3 160.6 0.1
1976 168.2 4.2 155.1 -3.4
1977 177.2 5.3 157.9 1.8
1978 174.2 -1.7 158.7 0.5
1979 174.4 0.1 165.0 3.9
1980 178.3 2.3 170.0 3.0
Source: Congressional Budget Office Study, Defense Spendingand the Economy, February 1983
20
a'..' ~.Al
TABLE 2
DEFENSE OUTLAYS AS A PERCENT OF TOTAL BUDGET OUTLAYS(BILLIONS OF FY 1972 CONSTANT DOLLARS)
TOTAL DEFENSE PERCENTAGE OF PERCENTFY BUDGET OUTLAYS OUTLAYS TOTAL OUTLAYS CHANGE
1959 146.7 81.2 55.3
*1960 143.3 78.4 54.7 -1.0
1961 149.9 80.0 53.3 -2.5
1962 162.4 83.3 51.2 -3.9
1963 163.0 81.1 49.7 -2.9
1964 170.4 81.5 47.8 -3.8
1965 166.8 74.1 44.4 -7.1
1966 183.0 81.3 44.4 0.0
1967 207.6 96.8 46.6 4.9
1968 224.7 105.7 47.0 0.8
1969 220.3 101.6 46.1 -1.9
1970 220.3 94.0 42.6 -7.5
. 1971 222.7 84.9 38.1 -10.5
1972 230.7 79.2 34.3 -9.9
1973 233.3 71.8 30.7 -10.4
1974 238.0 69.6 29.2 -4.8
1975 266.4 69.2 25.9 -11.3
19 76 279.5 67.0 23.9 -7.7
1977 286.3 67.3 23.5 -1.6
1978 300.2 67.2 22.3 -5.1
1979 304.4 69.5 22.8 2.2
1980 324.4 71.3 21.9 -3.9
Source: Historical Tables, Budget of the U.S. Government 1985
21
2. Military Spending from Kennedy to Carter
When President John Kennedy assumed office in January
1961, the country was spending just over forty billion dollars
per year on national defense. Defense spending had declined
during President Eisenhower's second term and the new Presi-
dent felt that forty billion dollars was not adequate to meet
the Soviet challenge. Therefore, during his term of office,
the level of defense budget authority increased by over 15
percent and defense outlays rose by 9 percent. Kennedy applied
the bulk of the increased funds into accelerating both the
Sstrategic land-based Minuteman missile program and the Polaris
sea-based missile program which were originated by the Eisenhower
administration. The administration of these programs on a
crash basis resulted in a quantum improvement in the strategic
weaponry of the United States. For example, according to
A... Jane's Fighting Ships, when Kennedy assumed office the United
States had three Fleet Ballistic Missile Submarines each
equipped with sixteen launchers for a total of forty-eight
launchers in commission [ReS. 23]. Six years later, by halving
A the program time, an additional thirty-nine submarines equipped
with a total of 624 launchers were added to our strategic
arsenal. Similar results were achieved in the Minuteman program.
In December 1960, the United States had nine operational ICBMs.
Six years later in 1966, the country had over 1,000 operational
missiles. [Ref. 241
The conventional forces were built up as well by the
Kennedy administration. The President increased the size of
F 22
%°°" . . . . ++ • . .o
the armed forces as well as procurement funding levels. By
the end of 1965, the efforts of the Kennedy administration had
increased the size of the Naval fleet by sixty-one ships, Air
Force tactical squadrons by twenty-four, airlift squadrons by
five, and Army ground combat divisions by five [Ref. 25]. On
the even of the Vietnam War the nation's conventional forces
were in a much improved condition.
The defense budgets during the Administrations of
Lyndon Johnson were driven by the Vietnam War in Southeast
Asia. Between fiscal years 1964-1968, the budget authority
for the Pentagon increased by over 28 percent, primarily due
to the war effort. As shown from TabLe 1 the total defense
budget authority as approved by Congress in 1968 was $235
billion, which included $26.8 billion dollars to support the
Vietnam War. This amount was the highest level of authority
since the 1952 Korean War level of $288 billion and is
significantly higher than President Carter's 1980 level of
$178 billion. Additionally, Table 2 shows that defense outlays
as a percentage of total federal budget outlays reversed a
downward trend and were 47 percent of total outlays in 1968.
- - By 1980 this amount has declined by 53 percent to a figure of
only 22 percent of total outlays.
During the Johnson years, expenditures for other than
war-related items were reduced. Not only was all the increment
in the budget diverted to the war effort, but funds were also
taken from other areas of the defense budget. Spending for
23
strategic forces dropped from 27 percent of the budget before
the war to only 9 percent in 1966. The development of a new
manned strategic bomber to replace the aging B-52s was signi-
ficantly delayed due to the reduction in funding. Shipbuilding
for the Navy suffered as well. During the five years prior
to the war, the Navy constructed an averaged of forty-five ships
per year. During the entire war, only eight ships were built.
[Ref. 261
In the first yeai of the Nixon administration the U.S.
Senate turned against the Vietnam War toward a new, less
assertive foreign policy [Ref. 27]. The mood of the Senate
changed after the Tet offensive in 1968 and with President
Johnson's decision not to seek reelection. The effect of this
change was a dramatic decline in the level of defense spending.
Defense budget authority decreased seven years in a row from
fiscal years 1969-1975. Tables 1 and 2 show that during the
Nixon tenure, constant dollar defense spending decreased
about 30 percent and defense outlays as a percentage of total
federal budget outlays declined by 36 percent.
The spending cuts were not made in a vacuum. The
Vietnam War and Watergate crises generated a public antipathy
toward adequate defense budgets. The desire of the American
public was to devote all available resources toward improving
domestic issues confronting the war-torn nation. Enviornmental
and energy issues were very high on the nation's agenda. During
this period of time, the sense of Congress was truly a reflec-
tion of the sense of the people. [Ref. 281
24
During President Ford's first year in office a highly
secret National Security study reported seribus deficiencies
in the nation's defense posture. Recognizing that the national
security situation was becoming precarious, the Ford adminis-
tration laid down a five year plan increasing the defense budget
by a real increase adjusted for inflation of 40 percent or
about 8 percent per year in fiscal years 1977-1981. Included
in the Ford defense plan was the building a full force of 244
- B-I strategic bombers, deploying the MX by 1983, construction
of thirty-two naval ships per year, funding for three Trident
submarines every two years and major purchases of tactical
fighter aircraft annually [Ref. 29]. During Ford's abbreviated
tenure, defense budget authority increased 6.5 percent from
1975 to 1976 increasing from a negative 2.3 percent to a posi-
tive 4.2 percent.
The Democrats took control of the White House in 1976
with the election of President Carter who had campaigned
strongly on the issues of world peace and human rights. Al-
though a minority of lawmakers were beginning ,to understand the
shift in military balance between the U.S. and the Soviet Union,
the country was still healing from the effects of Watergate and
" elected Carter over voting for the more hawkishly-perceived
• .Ford.
In the first year of the Carter Administration major
portions of the Ford program were phased out or reduced. As
a result between FY 1978 and 1980, forty billion dollars in
25
4wV
-'6 =,-
investment funds were cut from the Ford plan. Strategic
reductions included the postponement of the MX system by four
years, the cancellation of the B-I bomber and the neutron bomb
programs altogether, reducing the Navy shipbuilding program
by one half and cutting the Trident building rate by one third
[Ref. 301. In addition, as Table 1 shows, new defense budget
authority dropped in 1978 and 1979 from the 177.2 billion dollars
in 1977 that had been approved by the Ford Administration.
The defense debate faded into the background and re-
mained rather quiet in 1977. In late 1978 and early 1979, a
change in opinion began to emerge in the Senate. The mood
0accelerated as the Senate studied SALT II and began a pains-
taking analysis of the balance of power between the two super
powers. A Library of Congress study entitled Congress and
Foreign Policy--1979, states:
'\" Perhaps the primary impact of Congress on foreign policyduring 1979 was to force into the open a major debateon the adequacy of U.S. strategic and defense posture .it was the Senate consideration of the SALT II treaty,and the raising of doubts as to whether it should beratified, that brought the strategic issue to the fore-front of public discussion. [Ref. 31]
During the Senate debate of SALT II a consensus began
to emerge on the underlying trends in the nation's defenses.
N-.. As Joshua Muravchik writes in a paper entitled, "The Senate
and National Security: A New Mood":
The SALT II hearing did something interesting. . . . Thediscussions very quickly became technical--the heavymissiles, verification, the Backfire bomber. One byone, a lot of the weight went out of those issues as ameans of arguing the treaty down, but in the process
26
, _X A -.-
a lot of senators and a lot of people testifying foundthey were learning from each other just what was ourstrategic strength [and] where we were heading. [Therewas] a general admission on both sides that indeed wewere falling behind. [Ref. 321
As a result of the alarming discoveries revealed during
the SALT II debate, the Senate demanded rearmament. It forced
President Carter to withdraw the SALT II treaty and through
the use of budget amendments greatly increased funding for
defense over the levels submitted by the Carter Administration
'[Ref. 331. The wave of support for rearmament and restoration
,. . of the nation's defenses swept the country and was swelled byN
the seizure of the U.S. Embassy in Iran and the Soviet Union's
Christmas invasion of Afghanistan. Americans had come to
the conclusion that the post-Vietnam pendulum had swung too far.
3. Defense Outlays as a Percent of GNP
Gross national product (GNP) is defined by Hitch and
McKean [Ref. 31] as simply the dollar value of a nation's
final output over a period of one year. It can be viewed as
the total volume of goods and services, valued at market
prices, that is available to satisfy the nation's needs for a
period. Hitch and McKean further explain that any consumption,
- replacement of wornout or obsolete equipment, additions to the
stock of capital, military outlays or any other government
expenditures must come from GNP. Therefore the resources that
are devoted to defense spending each year are essentially a
percentage of the outputs of capital and supply of labor both
of which make up GNP.
27
Table 3 is measured in constant fiscal year 1972
dollars and portrays defense outlays as a percentage of GNP.
An examination of defense spending in relation to available
GNP from FY 1960 to FY 1980 reveals that while GNP increased
by 100 percent during this period, defense spending as a per-
centage of GNP actually declined by 55 percent up to the Reagan
reversal. It is clear that as the economy has grown the
relative investment in defense expenditures has diminished.
Due to the defense reductions after the Vietnam War,
defense spending as a percent of GNP fell every year from 1969
to 1978 except for one year during the Ford Administration.
This decline was reversed as a result of the SALT debate.
During the debate the nation and its lawmakers began to realize
the degree of the armed force's inferiority and commenced
yearly increases in defense spending as a percentage of GNP
beginning with fiscal year 1979.
D. CHALLENGES TO NATIONAL SECURITY
1. General
There exists little argument that the basic mission of
the Armed Forces is to help preserve the United States as a
free nation, with its fundamental institutions and values in-
tact [Ref. 35]. In addition, the United States has global
interests and commitments to many nations whose national
sovereignty directly depends upon the strength of American
military power. To succeed in its mission, the U.S. military
forces must be strong enough to deter armed challenge and be
28
TABLE 3
DEFENSE OUTLAYS AS A PERCENT OF GNP(BILLIONS OF FY 1972 CONSTANT DOLLARS)
DEFENSE PERCENTAGEFY GNP OUTLAYS OF GNP
1960 737.2 78.4 10.63
1962 800.3 83.3 10.42
1964 876.4 81.5 9.29
1966 984.8 81.3 8.25
1968 1058.1 105.7 9.98
1970 1085.6 94.0 8.65
1971 1122.4 84.9 7.56
1972 1185.9 79.2 6.67
1973 1254.3 71.8 5.72
1974 1246.3 69.6 5.58
1975 1231.6 69.2 5.61
1976 1298.2 67.0 5.16
1977 1369.7 67.3 4.91
1978 1438.6 67.2 4.67
1979 1479.4 69.5 4.69
1980 1475.0 71.3 4.83
1981 1512.2 74.6 4.93
1982 1480.0 80.2 5.41
1983 1534.7 86.5 5.63
1984 1639.3 90.0 5.49
Sources: Historical Tables, Budget of the U.S. Government1985: Survey of Current Business, U.S. Dept. ofCommerce, October 1983/Vol. 63, No. 10:Economic Indicators, Prepared by the Council ofEconomic Advisers, p. 2, June 1985.
29
S
Acapable of successfully defeating challenges when called
upon.
Challenges to the security of the United States and
its allies are many. In particular, it is necessary to
maintain a military balance with the growing size and capa-
bilities of the Soviet Union's armed forces. This requirement
is absolute since the Soviet Union is not adverse to using the
power of its armed forces an evidenced by the following recent
examples; The shooting down of the Korean civilian airliner,
with the loss of-269 innocent lives; The establishment of
bases within striking distance of the Persian Gulf oil fields
endangering the free world's supply of oil; The growing arsenal
of weapons and Soviet personnel in Syria, Libya, Cuba, and
Nicaragua; The invasion of Afghanistan; And the Soviet pene-
tration of the island of Grenada designed to change the politi-
cal alignment in the Cairbbean basin and to improve its own
strategic position in the region [Ref. 36]. The aggressive
Soviet activity has been prompted by the Soviet's perception
ofweakness in the will and defense posture of the United States.
Should the Soviets ever achieve clear superiority, they would
most certainly try to exploit their military strength to a
greater degree. Defense Secretary Weinberger stated in The
Annual Report to the Congress for Fiscal Year 1983 [Ref. 371,
"There is nothing hypothetical about Soviet Military Power--
it is real; and it is the single greatest threat to the United
States and the Free World."
30
?z
2. Soviet Union Defense Expenditures
A major difference between defense spending in the
United States and the Soviet Union is that the yearly debates
over the appropriate level of defense versus non-defense pro-
grams in the United States are nonexistent in the Soviet Union.
Kremlin leaders can be confident of funding any military pro-
gram they desire without the problems of dealing with an
independent legislative branch, free press or adverse public
opinion.
One of the Kremlin's most closely guarded secrets,
kept not only from the outside world but also from the Soviet
people, is the true cost of their defense expenditures. Each
year Soviet officials publish an official figure for the defense
budget, but this cannot be taken as an indication of the true
defense budget because it is clearly insufficient to fund the
full range of Soviet military activities [Ref. 381. While the
defense budget of the U.S. is openly published, the defense
budget figure released by the Soviet Union represents only a
fraction of the Kremlin's total defense spending.
There was general acceptance in the West during the
early 1970's that the true Soviet defense burden accounted for
5 to 6 percent of the Soviet GNP [Ref. 391. However, in 1976,
the intelligence community suddenly revised that figure by
over 100 percent from 6 percent to 11-13 percent of GNP [Ref.
401. The primary reason for the revised estimates is that the
SCIA had covertly obtained information from the Soviet Defense
31CI ovrl
Ministry showing that defense spending was much higher than
the CIA had originally estimated [Ref. 41]. The CIA's revised
estimates as compared with the data in Table 3, shows that the
Soviet Union's defense outlays as a percentage of GNP for the
1970's were more than double that of the United States.
There are those who allege that the Soviet defense
burden is still understated and that the actual figure is much
higher. Economist William T. Lee, a highly respected Soviet
defense analyst, argues that the defense burden is more in
the range of 20 percent of GNP [Ref. 42]. Information re-
ceived from prominent Soviet dissidents such as Andrei Sakharov
claim that the burden is in excess of 40 percent [Ref. 43].
Precise estimates of defense spending for the Soviet
Union are difficult at best. Recent figures from the Depart-
ment of Defense now indicate that Soviet defense expenditures
have continued to increase in the 1980's as a percentage of
their GNP with the military share of the Soviet economy com-
manding a range of 15 to 17 percent of their total GNP by
1985 [Ref. 441. Defense analysts do agree, however, that the
massive Soviet military buildup over the past twenty years
has caused a shift in the military balance between the two
superpowers. Since 1960, the steady Soviet military spending
combined with the decline of by more than 20 percent in real
terms of U.S. defense spending in the decade of the 1970's,
caused the superiority of the United States military power
to disappear. The Director of Central Intelligence, William
-32
J. Casey stated in a recent speech [Ref. 45], "The growth in
overall Soviet military power, unmatched by the West over the
past 15 to 20 years, has encouraged them to try intimidation
to split our allies away from us and undermine our credi-
bility." The Reagan defense budgets as submitted to Congress
have been designed to counteract this ominous trend.
3. Soviet Military Buildup and Force Modernization
Over the past two decades, the Soviet Union has ex-
panded and modernized its military forces improving every
facet of their strategic and conventional forces both in
numbers and in quality.
As an example, while the United States is in the
twelfth year of debate over the deployment of its third
generation ICBM, the MX missile, to replace the aging Minute-
man III introduced in 1969, the Soviets are testing and will
shortly deploy, their fifth generation of ICBM's. During the
twelve years of debate in the U.S., the Soviets have already
deployed more than six-times the number of ICBM's that are
asked for in the entire MX missile program. [Ref. 461
The submarine-launched ballistic missile program which
represents one third of the United States defense triad has
not kept pace with the Soviets. Over the same period, the
Soviet Union built four new classes of submarine-launched
ballistic missiles and over sixty new missile submarines. The
United States built only two new types of submarine missiles
and withdrew ten submarines from strategic missions. [Ref. 47]
33
-.p
The Soviet Union has also expanded its intermediate
range and battlefield nuclear forces. According to General
John W. Vessay, Chairman, Joint Chiefs of Staff serving
President Reagan from 1982-1986 [Ref. 48], of gravest concern
is the SS-20 missile launchers, each of which contain three
nuclear warheads. More than eighty such Missile launchers
were added to the Soviet force so that more than 330 launchers
and reloads are now arrayed against Western Europe, Japan, and
China. This force could give the Soviets significant leverage
over the allies of the United States. The United States does
not have a comparable system to counter this threat.
Improvements to the Soviet's strategic aviation assets
include the development of the Blackjack, a long range strate-
gic bomber. The Blackjack is in the flight test stage of
development and is expected to be added to the existing modern
fleet of Soviet Backfire bombers in 1987. The Backfire bombers
were deployed initially in 1974 and have been produced at a
rate of thirty per year as compared to the aging fleet of 241
1950's vintage B-52's for the United States. The Blackjack
is larger and faster than the United States B-lB bomber which
will not deploy until 1985. [Ref. 49]
Secretary Weinberger reported in the Executive Summary
of the Annual Report to Congress [Ref. 50] that the Soviets
have maintained an overall numerical advantage in most cate-
gories of conventional forces during the postwar period. The
report further states that since the mid-1970's, the Soviets
34
IC.
have widened their advantage in nearly every force category by
producing major conventional weapons at rates exceeding those
of the United States and its allies combined. Since 1974, the
Soviet Union has produced twice as many tactical combat aircraft,
three times as many attack submarines, five times as many
armored vehicles including tanks and fourteen times as many
:artillery and rocket launchers.
The buildup of the Soviet military has resulted in the
number of active duty personnel far exceeding that of the United
States. General John W. Vessey reported [Ref. 50] that there
are about five million active military personnel in the Soviet
military as compared to a United States military force of only
two million. Soviet military experts agree that the Soviet
forces are well-trained and well-equippped to execute Soviet
policy.
E. REAGAN'S REARMAMENT PLAN
The cornerstone of the Reagan Administration has been the
commitment of Ronald Reagan to strengthen the Armed Forces of
the United States. Upon assuming office in January 1981, the
President stated [Ref. 511:
I was appalled by what I found: American planes thatcouldn't fly and American ships that couldn't sail forlack of spare parts and trained personnel and insuffi-cient fuel and ammunition for essential training. The
* inevitable result of all this was poor morale in our Armedforces, and difficulty in convincing our most experi-enced military personnel to stay on.
Dramatic increases have been achieved in the defense bud-
gets of the United States in the early 1980's due to the
35
4
leadership of President Reagan and the bipartisan support of
the Congress and the American people for a stronger defense.
Measured in constant 1985 dollars against the last full
defense budget of the Carter administration, defense budget
authority as shown in Table 4 has increased by 52 percent
during President Ronald Reagan's first term in office. This
increase is especially significant when compared to the period
of fiscal years 1972-1980, which experienced an actual overall
decline of .5 percent in defense budget authority. Defense
outlays as a percent of GNP have risen from 4.83 percent in
1980 to about 5.5 percent of GNP in 1984, and are projected to
0 rise to about 7.3 percent of GNP by 1989.
Improvements to the nation's armed forces are many. For
example, the B-lB strategic bomber program once cancelled by
the Carter administration was revived with the first long
range bomber in twenty-one years delivered in 1985. After the
U.S. had not built a strategic submarine for seventeen years,
the USS Ohio was launched in 1981 and will be followed by the
yearly production of one Trident submarine. The debate
-U- concerning the MX missile although far from over, has been
greatly influenced by the Reagan administration. In a state-
ment before the Senate Armed Services Committee, Secretary
of State George Shultz stated [Ref. 52], "A credible, flexi-
ble American strategic posture is vital to the stable balance
4 of power on which peace and security rest. And the MX is a
vital element of that stable balance." On July 17 1985 a
36
.-
TABLE 4
- DEFENSE BUDGET AUTHORITY(BILLIONS OF FY 1985 CONSTANT DOLLARS)
FISCAL YEAR TOTAL BUDGET AUTHORITY PERCENT CHANGE
1972 193.2
1976 181.5 - 6.05
1980 192.1 5.84
1982 242.2 26.08
1983 260.4 7.51
1984 269.9 3.65
1985 293.0 8.55
1986* 302.5 3.24
1987** 354.0 17.02
1988** 401.0 13.27
* Proposed FY-86 budget in current year dollars as
passed by the Senate
** Long range estimates in current year dollars
Source: Annual Report to the Congress on the FY 1985Budget, FY 1986 Authorization Request andFY 1985-89 Defense programs, p. 279
37
4>.0
House-Senate conference committee agreed to set a statutory
limit of fifty MX missiles, approving half the number President
Reagan had sought.
Conventional force improvements have included the fielding
of the ABRAMS tank, the first new tank for the Army in twenty
years. The Navy which shrank from about 1,000 ships in the
late 1960's to about 453 during the late 1970's has embarked
on a large scale shipbuilding program to build a 600 ship Navy
in response to the buildup and modernization of Soviet naval
forces. [Ref. bJ
0 F. SUMMARY
The late 1970's witnessed a change in the mood of the
American public concerning defense spending in response to the
*' unrelenting growth of Soviet military power. While America
>was examining its conscience, having been shaken by Vietnam
and Watergate, the Soviets were building up their military at
a rate far in excess of their legitimate needs.
• .The United States defense posture is very different from
what it was in 1980. The nation has begun to restore the
credibility of its military forces in the face of Moscow's
ongoing arms buildup. The challenge before the Administration
is to sustain the progress it has made in order to ensure the
completion of the rearmament plan.
The Reagan rearmament plan to counter the Soviet threat,
has not been without its critics. The pace and the economic
impacts of the administration's defense spending increases
38
.'.
ur rrrwrrr-r r r, r, ~- -
on the economy and federal budget deficits continue to be'.4
debated as President Reagan enters his second term.
-- V.
~y.1.4
.4..
S..4
S.
'~.1~
'S.
~1
39
A.,
Si
- .4 '~.* ~*..b,. ~ *.,*
III. DEFENSE EXPENDITURES AND THE U.S. ECONOMY
A. INTRODUCTION
Considerable controversy concerning the economy's ability
to accommodate the changes in defense spending has been
generated due to the significant increases in defense expen-
ditures as proposed by the Reagan Administration. Although
the economy will successfully adjust to most changes in the
long run, its ability to adjust in the short run has been
keenly debated. The question of whether the effects of rapidI
defense expenditures on the nation's economy during peacetime
are positive or negative is an extremely difficult one to
answer. There are experts and data to support both arguments
with opinions highly dependent upon the viewpoints of the
analysts. While most analysts do agree that the nations'
defense posture must be improved, the Reagan buildup plan has
not escaped the debate over the economic consequences of such
a spending program on the U.S. economy.
Concerns among policy analysts about the economic effects
of the Reagan administration's military buildup have been
expressed from the outset due to the pace and magnitude of
the nation's resources committed to national defense. There
are those who feel. that the rapid spending increases will
seriously risk the rekindling of inflation and undermine the
nation's economic growth. This argument has been frequently
40
. . .... ... ......... ........ .. .......... .. ..
raised by Semour Melman of Columbia University and has been
endorsed by the well-known economist John Kenneth Galbraith
[Ref. 54]. It is their belief that sharply increased spending
will bid up the cost of strategic materials and skilled labor
that are also needed by the civilian sector of the economy.
Supporters of the Reagan plan believe that the economy is
large enough to absorb the expanding arms expenditures. Noted
economist Murray L. Wiedenbaum explains that since the Reagan
buildup is well planned and will be spread out over a number
of years, the adverse economic effects that resulted from the
rapid, crisis-like buildups of the Korean and Vietnam wars
will not be duplicated [Ref. 551. William Nordhaus, a former
member of President Carter's Council of Economic Advisors, has
stated [Ref. 56], "The economic evidence indicates that the
administration's planned defense buildup will pose no substan-
tial economic risks, nor provide a major inflationary impetus
to the American economy."
This chapter will review the relationship between an
increased level of expenditures for national defense and the
effects that such an increase may have on the economy. The
relationship will be examined from a macroeconomic standpoint
and will include the issues of inflation, employment and long
run economic growth.
B. THE ISSUE OF INFLATION
One of the most important issues raised in the defense
spending debate is the potential effect of increased defense
41
outlays on inflation. No subject cuts across every socio-
economic class and effects the American public to such a
degree than that of inflation. Webster's New Collegiate
Dictionary [Ref. 57] defines inflation as "an increase in the
volume of money and credit relative to available goods result-
ing in a substantial and continuing rise in the general priceL
level." The measurement of inflation in the United States as
used in this study, is performed by the Bureau of Labor Sta-
tistics through the use of the U.S. Consumer Price Index (CPI).
Since its inception prior to World War I, the objective of the
CPI was to measure changes in the cost of a fixed market basket
of goods and services in order to gauge changes in consumer's
cost of living and to provide the American people, as well as
policymakers in government, industry, and labor, with an
accurate and easily understandable measure of the rate of infla-
.- tion [Ref. 581. Americans across the country have had to adjust
their personal financial plans such as the purchase of a new
home or the ability to send their children to college as a
result of high rates of inflation. It is not difficult to
understand why the potential inflationary effects that rapid
increases in defense spending may have on the economy is a
subject in which all Americans have a keen interest.
In the past when the United States has increased defense
spending as rapidly as the Reagan buildup plan proposes, it
has also experienced a substantial increase in inflation. As
can be seen from Table 5, in each of the past four major armed
42
9.
TABLE 5
ACCELERATION OF INFLATION DURING PREVIOUS MILITARY BUILDUPS(By calendar year; average annual percent increases)
START OF INFLATION RATE FOR THREE INFLATION RATE FOR THREEBUILDUP PRIOR YEARS (*) SUBSEQUENT YEARS (**)
1917 8.7 16.0
1941 1.5 6.2
1950 2.6 3.6
1965 1.4 3.3
Average annual rate of increase in Consumer PriceIndex for three years ending in the year when thebuildup began.
•* Average annual rate of increase in Consumer PriceIndex for three years following the year the buildupbegan (for example, in the case of World War II,1942-1944).
Source: Congress of the United States CongressionalBudget Office Study, Defense Spending andthe Economy, February 1983, page 5
43
U
conflicts, inflationary pressures resulted in higher rates of
inflation following the outbreak of each war. The data shows
that defense requirements in competition with the needs of the
general population for raw materials, labor and other defense
needs resulted in speculative surges in prices with the United
States involvement in World War I, World War II, Korean War
and the war in Vietnam. It is important to note that the
inflation rates for the three subsequent years during the
periods of World War II and the Korean War, do not truly por-
tray the actual inflation rates for these periods due to imposed
price controls by the government. Additionally, the large
buildup of the Vietnam War is generally credited with the
high rates of inflation in the early 1970's prompting Presi-
dent Nixon to apply wage and price controls in an effort to
control inflation. [Ref. 59]
The increased rates of inflation experienced during periods
of rapidly expanding defense spending greatly supports th(
view held by many that there exist a positive correlation between
rapid increases in defense spending and inflation. Although
the sources of inflationary pressures on the economy are numer-
ous, many analysts have suggested that the Reagan buildup will
result in similar inflationary pressures in the 1980's. In
his book, The Defense Industry [Ref. 601, Jacques Gansler
supports the view that the impact cf rapid increases in defense
spending would be to bid up the cost of required needs and
result in increased inflationary pressures. He states that
44
competition with the civilian market for labor, parts and
production machinery would create production bottlenecks and
result in price level increases.
As a senior fellow in the Brookings Economic Studies
program and past Chairman of the Council of Economic Advisors,
Charles Schultze in testimony prepared for the Joint Economic
- i Committee of the Congress, supports the view that the Reagan
buildup would be inflationary [Ref. 611. Schultze explains
that in contrast to other areas of the budget, a rapid in-
crease in military spending would require an abnormally large
expansion in the output of a particular group of firms or
industries. He further states that this would likely lead
to bottleneck cost increases as defense firms scramble to
increase output more rapidly and in the process bid up the
prices of particular materials, components, and labor skills
needed in defense production. As a consequence, Schultze
claims that the military would end up with cost overruns, and
that the civilian industries would face rising costs to the
extent that they must use the scare materials and labor whose
prices have been bid up.
The Reagan defense buildup has not increased the level of
"r inflation as many analysts had predicted it would. A review
of the actual changes in the CPI for the three years prior to
the Reagan buildup as compared to changes in the CPI for three
years following the start of the buildup shows that the Reagan
buildup has coexisted with decreasing levels of inflation. In
45
.NS
fact, the level of inflation has declined by over 100 percent
during this time. According to the Bureau of Labor Statistics
[Ref. 621 the average inflation rate for the three years prior
to the buildup (1978-1980) was 11.56 percent. This is in
sharp contrast to the average inflation rate for the three
years following the buildup (1981-1983) which had dropped to a
low rate of 5.53 percent. This is especially interesting in
that the Reagan buildup is particularly pronounced in the area
of procurement. In testimony before a Congressional Committee,
Richard Stubbing, former deputy chief, National Security
Division of OMB and presently the assistant provost, Duke
University [Ref. 63] explained that in the last five years,
Congress has appropriated 1.2 trillion dollars for defense
from 1981 to 1985, of which over 330 billion dollars of this
is real growth. Of the 330 billion dollars, about 190 billion
has gone into research and development and procurement with the
remaining 110 billion dollars marked for operational kinds of
expenditures. Reagan's defense buildup is in sharp contrast
to the Korean and Vietnam buildups in which personnel and
areas related to personnel received most of the appropriations.
Even with the heavy emphasis on procurement, the bottleneck
induced cost increases associated with past defense spending
expansions have not presented themselves as predicted.
An important factor in explaining why the U.S. economy is
able to support the Reagan program without creating the pre-
dicted inflationary pressures and supply shortages is due to
46J.
the significant amount of excess industrial capacity that
existed during this period. A Department of Commerce study
in 1982 [Ref. 64] examined this subject in detail. The study
estimated the 1985 output levels of over 400 industries and
then evaluated domestic production capabilities to supply
these demands for those industries that were most vital to the
defense effort. From this initial population, fifty-eight
industries were selected as most vital and studied in detail
because five percent or more of their 1979 output was directly
or indirectly related to defense needs. The most important
conclusion of the study was [Ref. 65], "for most of the fifty
eight industries, existing capacity is sufficient to supply
the projected (1985) demands of the economy." The report
further stated that the conducted research revealed no instance
where industry-wide supply bottlenecks were likely to prevent
the achievement of defense goals as established by the Reagan
program.
In the opinion of Dr. Wayne Schroeder, a professional staff
member with the Senate Appropriations Committee, Defense Sub-
committee, the substantial underutilized capacity throughout
the defense industry is due primarily to the underfunding of
defense in the 1970's [Ref. 66]. As a result, the excess
capacity in the industrial segment of the nation's economy has
allowed the Reagan program to proceed at its accelerated pace
without the inflationary pressures normally associated with
such a large buildup.
47
. -J-. 4 7-..,
- - - - -- - - - - - - - - - - - - - - - -
A recent study performed by Donald Vitaliano, an associate
professor at Rensselaer Polytechnic Institute [Ref. 671, also
provides a possible explanation for the lack of a positive
correlation between defense spending and inflation. Vitaliano
suggests that the popular belief that a rapidly growing mili-
tary budget will aggravate inflation is not consistent with
available evidence. Vitaliano's study presents the results of
an empirical analysis in which defense spending was analyzed
alongside with other variables to explain the rate of inflation
for the period 1955-1979. In examining the hypothesis that
increased defense spending leads to higher inflation, Vitaliano
concludes that there appears to be no perceptible impact on
the rate of price inflation separably attributable to defense
spending. Vitaliano, however, does suggest that inflationary
v expectations of increased defense spending may in itself pro-
duce a rise in the inflation rate. As an example, in order
A to hire the best people, wages for skilled people are bid up
during periods of increased military spending. The rise in
wage growth then leads to expectations of faster inflation and
the cycle is repeated with higher inflation resulting.
C. THE ISSUE OF EMPLOYMENT
There is disagreement among analysts over the effects of
defense spending on the economy, but it is clear to most that_4
the employment created by military spending greatly influences
the nation's defense budget. Unlike federal expenditures in
the form of transfer payments such as social security and
48
% I
unemployment benefits that have a geographically diffused
impact, military spending for goods and services affects a
specific area. A member of Congress can demonstrate his or
0- her political effectiveness back home by lobbying for in-
creased military spending in his or her state or district.
Senator John Tower, Chairman of the Armed Services Committee,
once wrote [Ref. 68):
Some Senators . . . have asserted that defense spendinghas an adverse effect on efforts to improve the currentunemployment situation in this country. This rationale,if accurate would lead us to believe that defense spendingresults in little or no economic benefit. I find thisto be a most intriguing argument when, in one breath,Senators will argue for reductions in defense, and then,
0, in another breath, will argue just as strongly that suchreductions should not be made in programs located intheir states.
The Reagan buildup will have a significant influence on
employment levels for specific occupations as well as fcr the
. country as a whole. Major defense programs initiated during
the Reagan years will require funding well into the twenty-
first century thus altering the employment picture for many
years to ,come. This section will address two very important
issues concerning the Reagan buildup and its relationship to
employment: 1) The effect of the defense buildup on the cost
of skilled labor and professionals which are also needed by
the civilian sector of the economy; 2) Whether the increased
funds for military spending will create as many jobs as other
federal spending programs. It is important for the American
public and its governmental leaders to understand these issues
49
and to be aware of the employment effects of defense spending
when engaged in a debate over the consequences of the defense
spending levels required to safeguard the nation's national
security. The pace of the Reagan buildup coupled with the
reduction of funds for nondefense programs makes these issues
especially important in the early 1980's. Defense outlays,
expressed in 1972 constant percentages, have increased from
21.9 percent of total federal budget outlays in 1980 to 24.5
percent in 1984 [Ref. 69]. This change in funding allocations
represents a twelve percent increase with higher percentagesprojected for the years ahead.
*Addressing the issue of skilled labor shortages, Lester
Thurow [Ref. 70] argues that he perceives the economy as one
with shortages of skilled labor and technical talent, where
workers wages would rise significantly as the civilian and
defense sectors compete for their skills. Thurow further
states that the diversion of engineering talent to the defense
industry will weaken U.S. technological competitiveness with
Japan and Western Europe. This aspect of the employment issue
will be addressed in the next section concerning the effects
of defense expenditures and long run growth. In making his
argument, Thurow does explain that much of the debate over
this issue is based more on intuition than on sound analysis.
Historical employment data relating to defense buildups com-
I Vparable to the size that Reagan proposes pertain to periods of
crisis, not the managed and well-planned expenditure increases
) 50
of the 1980's. Thurow added that due to the lack of hard data,
many of his own thoughts and conclusions concerning the
effects of defense spending on the U.S. pool of scientists and
engineers, are based on his subjective observations about the
effects of defense spending on high technology firms in the
Boston, Masachusetts area.
Michael Gordon, a staff correspondent on defense issues-for the National Journal, concurs with Thurow and has written
[Ref. 711 that although most economists agree that there may be
- .. a shortage of engineers and computer specialists, precisely the
type of people needed by the defense industry, the lack of hard
" data concerning the effects of what Reagan's increased military
spending might have on this pool of labor makes it very diffi-
cult to evaluate the economic consequences.
In an effort to determine the actual effects of the Reagan
buildup on employment for professionals and skilled workers,
the Congressional Budget Office conducted research on this
subject in 1983 [Ref. 72]. The study reported that although
there appeared to be few, if any skill shortages in the.slack
economy of 1982-1983, future shortages may develop for some
types of engineers, computer specialists, and skilled craftsmen
such as machinists and tool and die makers. However, the CBO
research also found that the supply of professionals and skilled
workers in these disciplines is increasing in response to the
growing demand. Past unemployment rates for professional and
. skilled workers as classified by the CBO are shown in Tables 6,
V. 51
* 1.
TABLE 6
UNEMPLOYMENT OF COMPUTER SPECIALISTS, SCIENTISTS,AND ENGINEERS (By percentage for calendar year)
COMPUTER TOTAL AEROSPACEYEAR SPECIALIST SCIENTISTS ENGINEERS ENGINEERS
-. 1964 .... 1.4 1.5
1965 .... 1.0 1.6
1966 .... 0.7 0.0
1967 .-- 0.8 0.0
1968 -- 0.9 0.7 0.0
1969 -- 0.5 0.8 2.4
1970 -- 1.0 2.2 6.4
1971 2.9 3.1 2.8 6.3
1972 1.4 2.5 1.0 1.9
1973 1.0 1.9 1.0 1.9
1974 1.3 1.2 1.0 1.9
1975 1.9 1.8 2.7 1.9
1976 1.5 2.1 2.1 1.9
1977 1.9 2.5 1.3 1.8
1978 1.0 2.2 1.2 1.7
1979 1.1 2.7 1.2 0.0
1980 1.5 2.3 1.3 2.7
1981 1.1 2.8 1.5 0.3
1982 1.5 3.1 2.4 2.0
Source: Bureau of Labor Statistics
Note: (--) Data not available
w2
~52
I.
Table 7. As can be seen from the tables, unemployment rates
generally begin increasing by 1982, indicating that even with
* the Reagan buildup well underway, there existed a small degree
of slack in the areas of employment considered to be the most
critical. The study also noted that the National Center for
Educational Statistics, projects that in contrast to overall
declining college enrollments, the number of students graduating
with engineering degrees will increase by forty percent between
1979 and 1985. Additionally, the number of students with
bachelor's degrees in computer and information science has
expanded by sixty-seven percent between 1972 and 1980. The
CBO's research revealed that past shortfalls of skilled
machinists tool-and-die makers have spawned innovative changes
in work patterns, with automated machinery, operated with less
skilled workers, being substituted for scarce journeymen. It
is predicted that if a prolonged shortage of skilled workers
were to develop, similar work improvement methods would be
adapted thus reducing inflationary wage pressures. The study
concludes that any general "bidding up" of wages for skilled
workers and professionals resulting from a temporary shortage
would be met by an increased labor supply due to a properly
functioning, free market system.
The question of whether or not military spending creates
as many jobs as other spending programs has received much
attention. Conducted research finds most analysts generally
agreeing that on a macroeconomic level, a dollar spent on defense
53
TABLE 7
UNEMPLOYMENT OF CRAFT WORKERS, BY TYPE OF WORKER(By percentage for calendar year)
YEAR MACHINISTS AND JOB SETTERS TOOL AND DIE MAKERS
1964 2.7 1.5
1965 1.6 1.1
1966 1.7 0.5
1967 1.4 0.9
1968 1.5 2.0
1969 1.3 1.4
1970 4.9 3.5
1971 5.1 4.6
1972 3.5 3.7
1973 1.8 1.6
1974 4.9 2.2
1975 7.2 7.9
1976 6.0 3.1
1977 3.7 2.0
1978 3.0 2.2
1979 2.7 1.1
1980 6.7 2.7
1981 6.3 5.6
1982 12.4 5.2
Source: Bureau of Labor Statistics
54
h '
purchases will result in the same number of jobs as a dollar
spent on nondefense purchases. Rudolph Penner, Director
Congressional Budget Offices, stated in Congressional testi-
mony [Ref. 73] that "shifts between defense and nondefense
purchases have only negligible employment effects." Penner
explained that simulations using the models of Data Resources
Inc., and Wharton Econometric Forecasting Associates show that
increases in overall defense or nondefense spending on goods
and services have about the same overall effect. Penner also
noted that many forms of defense spending are very similar to
nondefense forms. As an example, the macroeconomic effects of
constructing an aircraft runway are very similar to the effects
of constructing a highway. David Chu, Director of Program Analy-
sis and Evaluation in the Office of the Secretary of Defense
also testified in Congressional Hearings [Ref. 74] that "
there is no difference on average in the number of jobs created
by defense and nondefense Federal purchases." Mr. Chu reported
that DoD and non-DoD economic forecasting models conclude that
a shift in the composition of federal outlays from nondefense
spending towards defense spending does not reduce employment,
or put another way, a dollar spent on defense purchases will
yield the same number of jobs as a dollar spent on nondefense
purchases. A Congressional Budget Office study reported [Ref.
751 that an additional ten billion dollars in defense spending
could create up to 250,000 additional jobs and that the same
ten billion dollars spent on nondefense purchases in the public
55
7,
and private sector could create almost 250,000 jobs. Noted
military spending critic Robert DeGrasse, agrees with others on
this matter. He has stated in Congressional testimony [Ref. 761
that if you spend one billion dollars in mass transit production
versus one billion in military spending, the level of jobs
created will be about the same.
D. THE ISSUE OF LONG RUN GROWTH
Long run economic growth has always been a national policy
goal. Increased growth is generally accepted to be dependent
upon advances in productivity and technology allowing for an
* increased level of production in the quantities of goods and
services made available. Additionally, the concept of long
run growth may be viewed to include changes in leisure time,
vacation lengths and retirement ages for the American worker.
Almost every government spending program has some effect
, on the long run growth of the economy. There are those who
believe that unlike most federal spending programs, defense
spending absorbs resources that could otherwise be employed to
produce goods and services thus adversely affecting the long run
growth of the economy. An expert on productivity and economic
growth, Professor Seymour Melman [Ref. 77] notes that since
the military budget is used to purchase resources such as tools,
energy, raw material, skilled labor and managers, it is effec-
tively a capital fund. According to Melman, the capital fund
concept for military budgets is equivalent to the private
industry's term of capital which is understood to be composed
56
I.
-. of fixed and working capital. In testimony submitted before a
Congressional Task Force on Economic Policy and Growth,
Professor Melman writes [Ref. 781:
". . . A large ratio of military to civilian capitalformation drains the civilian economy. The viabilityof the United States as an industrial society is threatenedby the concentration of capital in a fund that yieldsno product useful for consumption or for further produc-
.V tion. This looting of the means of production on behalfof the military economy can only be accelerated as aconsequence of the unprecedented size of war budgetsadvocated by the Reagan Administration.
Professor Melman also points out in his testimony that
*4. since the product of defense spending does not yield products
for further production, there is an absence of marginal produc-
tivity of capital. The gradual improvements in the production
process associated with products that can be used for further
production are not possible. As an example, Melman notes
- that a nuclear powered submarine or a modern fighter plane is
a technological masterpiece, but neither can be used for further
production. [Ref. 79]
An additional argument expressed in the debate over defense
spending and its effects on long run growth pertains to the
belief that the United States will experience a decreased
*-'" level of technological competitiveness for its products on
the world market. Testifying before Congress in 1983, DeGrasse
[Ref. 80] stated that approximately thirty percent of the
Nation's scientists and engineers were working for defense-
related projects. DeGrasse further explained that by having
such an important group of people unavailable to develop
57
~44
civilian technologies, U.S. products will be less competitive
on the world market, thereby reducing overall growth.
Other analysts would disagree with Melman and DeGrasse
4" and suggest that defense spending has beneficial effects on
productivity and long term growth. They argue that while it
is true that defense spending employs much of the nation's
scarce scientific and engineering talent and considerable
capital, mnay research and development efforts sponsored by
the DoD yield knowledge that proves valuable in civilian
production. In his book, The Economics of Peacetime Defense,
Murray Weidenbaum writes [Ref. 81], ". . defense spending has
been making a substantial contribution to technological develop-
ments of great importance to our economy." Technologies that
have been cited as having profited from military spending
spillovers include: aerodynamics, jet engines, computers,
electronics, numerically controlled machine tools, lasers and
nuclear power [Ref. 82].
There are two broad reasons generally voiced to explain
how military spending enhances civilian sector technology
[Ref. 831. One theory holds that advanced military require-
ments continually encourages scientists and engineers to
improve the existing "state of the art." Senior Pentagon
economist, David Blond [Ref. 84], comments:
Defense sets goals that are difficult to meet; and ournew programs often tax the limits of technology. Onlythe Department of Defense's budget is rich enough toexperiment with new approaches to complex problems.It is my belief that we cannot foretell exactly the
58
future path that technology must take in the quest fornew commercial applications and solutions to nondefenseproblems. In the same sense that we seed the clouds inthe hope for rain, so too we seed our research laboratoriesin the hope for finding solutions to difficult problems.
. The second theory views defense spending as a source of
demand for new products. The logic behind this theory is that
by providing an initial market and premium prices for major
advances, defense purchases have speeded the introduction of
new technologies. Several good examples of innovations that
have benefited from defense purchases when the price was
significantly higher than private industry was willing to pay
are transistors and integrated circuits. Initial purchases041 such as these by the defense department have allowed manufac-
turers to improve their productivity through better production
methods and reduced cost via the concept of marginal productivity.
.* i, The U.S. Department of Labor, Bureau of Labor Statistics
publishes indexes of output per hour of all persons and related
- measures for different sectors of the economy to include the
private business sector and the manufacturing sector. These
productivity measurements show the relationship between gross
" product originating in these sectors and output per hour of all
persons. The measurements are used to obtain an overall measure
of productivity growth for respective sectors of the economy.
- The data in Table 8 shows the productivity measurements
for the business and manufacturing sectors. An analysis of
the productivity data for both sectors reveals that productivity
has dramatically slowed in the 1970's, at a time when defense
59
TABLE 8
PRODUCTIVITY; BUSINESS AND MANUFACTURING SECTORS(1977 = 100)
BUSINESS PERCENT MANUFACTURING PERCENT
YEAR PRODUCTIVITY CHANGE PRODUCTIVITY CHANGE
1950 49.7 49.4
1960 64.8 30.4 60.0 21.5
1970 86.1 32.9 79.2 32.0
1973 94.8 10.1 93.0 17.4
1974 92.5 -2.4 90.8 -2.3
1975 94.5 2.2 93.4 2.9
1976 97.6 3.3 97.6 4.5
1977 100.0 2.5 100.0 2.5
1978 100.5 0.5 100.9 0.9
1979 99.3 -1.2 101.6 0.7
1980 98.7 -0.6 101.7 0.1
1981 100.6 1.9 104.9 3.1
1982 100.8 0.2 107.1 2.1
1983 103.7 2.9 111.6 4.2
1984 107.4 3.6 115.0 (est) 3.0
Source: 1) (Years 1950-1983), Handbook of Labor Statistics;U.S. Department of Labor, Bureau of 1-borStatistics, June 1985, Bulletin 2217. p. 233
2) (Year 1984), Economic Indicators, prepared
for the Joint Economic Committee by theCouncl of Economic Advisors, Auqust 1985,
'... p. 16
60
% .u%-
-:
- -, -----.... . .. -, - - i - -r . L .I -t' -- Ttr'-,,- -'---r- ,, • - - '
spending was on a long downturn. Especially interesting is
that productivity levels in both sectors begin to increase in
1981 and have continued to do so during the Reagan buildup.
In the Economic Report of the President, transmitted to the
Congress in February 1985, President Reagan reported [Ref.
85], "Productivity growth in the business sector has averaged
2.2 percent since the fourth quazter of 1980, compared with
a rate of less than 0.3 percent over the prior 4 years."
The actual productivity data is at odds with the predic-
tions of Professor Melman. It is clear that there must be
many factors affecting the rates of productivity and long run
growth with defense spending being just one of those factors,
not the overriding influence.
E. SUMMARYA proper understanding of the effects of defense spending
on the economy is necessary for decision makers and the
general public. This knowledge is required in order that
less than accurate assumptions or predictions concerning the
economic effects of defense spending may be identified and
disputed as such. This chapter has shown that the actual
economic data achieved during the years of the Reagan buildup
under study (1980 -1984), pertaining to inflation, employment
and long run economic growth does not necessarily support the
theories of noted analysts.
The bottleneck induced cost increases associated with past
defense buildups have not presented themselves as predicted.
61
Likewise, in the area of employment, few skill shortages have
developed and those employed in skills and professions iden-
tified as critical in the defense effort are expanding their
'.A numbers rapidly. It was also noted that on a macro level,
defense spending will create the same number of jobs as non-
defense spending. Finally, long run economic growth was
shown to have greatly increased despite predictions to the
contrary.
0 -
.- i
S'I.
'"*V
IV. DEFENSE SPENDING AND BUDGET DEFICITS
A. INTRODUCTION
Current federal government deficits are viewed by the
nation's political leaders and a growing majority of the
American public to be the number one issue facing the nation,
posing an extreme threat to the nation's economic survival.
These large deficits are driving up interest rates, adversely
affecting American exports, turning the United States into a
debtor nation and have cuased the interest component of the
federal budget to be its fastest growing segment.
The early Congressional and public support for the Reagan
defense buildup has waned due to the increased awareness of
the consequences of persistent deficits on the economy. A
recent Gallup Poll conducted in June 1985 [Ref. 861 indicates
that the public is increasingly giving highest priorityto
cuts in defense spending to reduce the deficit. The survey
found that, of those polled, 81 percent characterized the
federal debt as a serious problem with a majority of Americans,
66 percent favoring cuts in defense spending as a deficit
reduction measure. The percentage of the public favoring
defense spending cuts is up from a recorded 61 percent in
December 1984 and from 57 percent in January 1983. A significant
finding of the survey was that 39 percent favored cuts in
government spending for social programs, representing a decrease
63
from the 41 percent recorded in both 1984 and 1983. This
change of public attitude towards social program spending, has
added further pressure to decrease the defense budget as a
means to reduce federal deficits.
The American public's shift in attitude favoring a reduc-
tion in defense spending will jeopardize the President's
program to rebuild the nation's armed forces. This change in
the public's attitude has been influenced in part by those who
-} feel that defense cuts must be made in order to achieve
*domestic spending cuts, or that the defense department has not
contributed its fair share to deficit reductions. The current
Director of the Economic Studies program at Brookings and past
Director of the Congressional Budget Office from 1975 to 1983,
Alice M. Rivlin [Ref. 871, has explained that defense outlays
account for 30 percent of all federal spending and are an
obvious source of possible deficit reductions. Rivlin has
%[ further expressed that "The nation needs and can afford a strong
defense, but the rapid defense buildup advocated by the Reagan
administration is both unjustified and unwise." Others, such
as Alfred S. Eichner, a Professor of Economics at Rutgers
University and Director of the Center for Economic Research
[Ref. 88], has written that defense spending can be reduced
significantly without any weakening of the nation's ability to
defend itself. Eichner explains that the sums saved can be
used to bring federal outlays more closely in line with tax
64
revenues. Another viewpoint as expressed by Richard Barnard,
the Editor of Defense Week [Ref. 89] calls for limiting
* defense budget increases to only four percent a year for four
consecutive years as a way to reduce the deficits.
This chapter will examine the issue of defense spending and
* federal budget deficits. While it is true that the current
defense buildup is an important contributing factor in the
growth of the federal debt, a proper understanding of the
relationship between defense spending and budget deficits must
include a study of the relative sizes of past and present
defense budgets as compared to nondefense spending programs.
The federal budgetary data suggests that President Reagan's
plan for rebuilding America's defenses should not be held
as the scapegoat for the current deficits and therefore, should
- not be the prime target for budgetary decreases.
V . The examination of this issue will begin with a review of-.
federal deficit growth. A discussion of the economic conse-
quences resulting from persistent large budget deficits will
P. follow. The chapter will continue with a description of budge-
tary outlay trends as influenced by their degree of controlla-
bility. Chapter IV will conclude by addressing the call for
". defense cuts in the name of deficit reduction.
B. FEDERAL DEFICIT GROWTH
Though the federal budget has shown a suprlus in only
eight of the forty years since World War II, the deficits
prior to 1982 were much smaller in relation to the size of the
65
economy. From 1965 to 1981 the deficits averaged 1.7 percent
of GNP. Now, however, the federal deficit is stuck at about
5 percent of GNP. [Ref. 901
Former United States Secretary of the Treasury, William E.
Simon, has described the growth of the federal debt in a
recent speech by stating:
... . This conservative president came into officewith a national debt approaching one trillion dollars,and in four short years had added $700 billion more toit. This is incredible because at this rate, beforehe leaves office he will have been responsible for pro-ducing more of the national debt than all 39 presidentswho preceded him in the 200 years of the presidency.[Ref. 91]
0In order to fully understand and appreciate the immense
magnitudes of the current deficits, actual and projected
federal budgetary data are presented in Table 9 in billions
of current dollars and in Table 10 as a percentage of GNP.
The data clearly shows the unprecedented growth in the level
of deficits as already having occurred and as projected during
the Reagan Administration. In fiscal year 1981 the deficit
was about $58 billion, or approximately 2 percent of GNP. In
only two years it had tripled, reaching $195 billion or approxi-
mately 6 percent of GNP in 1983. The cumulative effect of the
deficits on the nation's debt as commonly measured by the
amount of debt held by the public, has been staggering. From
the end of 1980 to the end of 1984, this measure grew by about
85 percent. By the end of 1989 it is projected to grow by
another 85 percent. At current rates, the nation's total
debt will almost quadruple during the 1980's. [Ref. 92]
66
:[i[.-
o.~
TABLE 9
REVENUES, OUTLAYS, DEFICITS, AND DEBT HELD BY THE PUBLIC(By fiscal year, in billions of dollars)
UNIFIED SURPLUS OR DEBT HELDYEAR REVENUES OUTLAYS DEFICIT BY THE PUBLIC
1965 116.8 118.4 -1.6 261.6
1970 192.8 195.7 -2.8 284.9
1975 279.1 324.2 -45.2 396.9
1976 298.1 364.5 -66.4 480.3
1977 355.6 400.5 -44.9 551.8
1978 399.6 448.4 -48.8 610.9
1979 463.3 491.0 -27.7 644.6
1980 517.1 576.7 -59.6 715.1
1981 599.3 657.2 -57.9 794.4
1982 617.8 728.4 -100.6 924.4
1983 600.6 796.0 -195.4 1,141.8
1984 666.5 841.8 -175.3 1,312.6
1985P 735.0 938.0 -203.0 1,526.0
1986P 788.0 995.0 -206.0 1,740.0
1987P 855.0 1,080.0 -225.0 1,972.0
1988P 934.0 1,174.0 -240.0 2,220.0
1989P 1,005.0 1,270.0 -266.0 2,490.0
1990P 1,088.0 1,378.0 -290.0 2,786.0
Source: The Economic and Budget Outlook: Fiscal Years
1986-1990; The Congressional Budget Office,February 1985, p. 159
Notes: 1) * Does not reflect the minor adjustments fromoff budget outlays such as the Postal Service,
the Federal Financing Bank, or the StrategicPetroleum Reserve
2) P = CNO projections
67
°.. J
... 6
TABLE 10
REVENUES, OUTLAYS, DEFICITS, AND DEBT HELD BY THE PUBLIC(By fiscal year, as a percent of GNP)
UNIFIED SURPLUS OR DEBT HELDYEAR REVENUES OUTLAYS DEFICIT * BY THE PUBLIC
1965 17.7 17.9 -0.2 39.6
1970 19.9 20.2 -0.3 29.4
1975 18.9 21.9 -3.6 26.8
1976 18.1 22.2 -4.0 29.2
1977 19.1 21.5 -2.4 29.6
1978 19.1 21.4 -2.3 29.2
1979 19.6 20.8 -1.2 27.3
1980 20.1 22.4 -2.3 27.8
1981 20.8 22.8 -2.0 27.5
1982 20.3 23.9 -3.6 30.5
1983 18.6 24.7 -6.1 35.4
1984 18.6 23.5 -4.9 36.7
1985P 19.1 24.3 -5.3 39.6
1986P 19.0 23.9 -5.0 41.8
1987P 19.1 24.1 -5.0 44.0
1988P 19.3 24.3 -5.0 46.0
1989P 19.3 24.4 -5.1 47.9
1990P 19.4 24.6 -5.2 49.7
Source: The Economic and Budget Outlook: Fiscal Years1986-1990; The Congressional Budget Office,February 1985, p. 160
Notes: 1) Does not reflect the minor adjustmentsfrom off budget outlays such as the PostalService, the Federal Financing Bank, or
"' the Strategic Petroleum Reserve
2) P = CBO projections
68
The tremendous growth in the deficits cannot be attributed
to a single cause. In addition to increased levels of federal
outlays, there are at least two other major factors that have
contributed to the growth of the deficits; 1) a reduced level
of tax revenues during the 1980 to 1984 period resulting from
changes to the tax laws, and 2) the effects on both the revenue
and spending components of the federal budget as influenced
by the 1981-1982 recession.
Shortly after assuming office, President Reagan and his
newly appointed Director of the Office of Management and
Budget, David Stockman, implemented what became known as the
"supply-side" theory of economics. The President and his OMB
Director were confident that it was possible to raise defense
spending, cut income taxes, and balance the federal budget at
the same time using this approach. The cornerstone of the
new supply-side approach was a significant reduction of income
taxes, coupled with tight monetary control. It was felt that
by displacing the growth of the government with a robust level
of growth in the private sector, marketplace developments would
allow increased defense expenditures to coexist with a balanced
federal budget. [Ref. 931
The large tax cuts that followed helped reduce federal
tax receipts as a share of GNP from 20.1 percent of GNP in
1980 to 18.6 percent in 1984. This reflected the Economic
Recovery Tax Act (ERTA), that was signed into law in August
1981, and legistlated sweeping changes in both the individual
69
I.1..,
and corporation income tax systems. The act, the largest tax
reduction in U.S. history resulted in an across the board
reduction in individual income tax rates amounting to 23
percent at the end of three years, and an immediate cut in
the top bracket rate from 70 to 50 percent. The law also
established that beginning in 1985, the tax brackets and
exemption amounts would be indexed annually for inflation.
The indexing of income tax brackets to adjust for inflation
would prevent the erosion of the ERTA tax reductions by
insuring that inflation would not push individuals into higher
tax brackets. [Ref. 941
Tax revenues, entitlements and other mandatory spending
levels were also affected by the 1981-1982 recession in which
actual inflation and economic growth figures deviated from
projected amounts. A former Air Force Comptroller and
presently the Military Assistant for Economics, (OSD) LTC
Stephen Russell, USAF [Ref. 951 points out that the very
restrictive monetary policy of 1981 imposed by the independent
Federal Reserve Board in an effort to reduce the high infla-
tion and interest rates of the late 1970's, generated the
deep recession resulting in deviations of actual economic
performance from those planned by the Reagan Administration.
Russell notes that during the years of 1982 and 1983, both
inflation and economic growth rates were much lower than
projected, and that these deviations of actual economic
performance from the Reagan plan have had a significant impact
70
"'-.-.
- - -.. .:,. -
on the deficit picture. Instead of a projected growth rate
of 5.2 percent for 1982, the actual growth was a negative 1.2
percent. And the actual rate of inflation for 1982 was three
points below that predicted by the administration. The rationale
for this economic behavior is found in the Economic Report of
the President, February 1983:
Falling inflation rates will impact on revenues morethan on expenditures because the personal income taxstructure is progressive; hence actual inflation ratesbelow plan tend to raise the deficit.
A slowing of economic growth (and the correspondentrise in the unemployment rate) will cause revenues tofall because the tax base shrinks and expendituresto rise automatically as unemployment-sensitive outlaysexpand. (A one percentage point change in the unemploy-ment rate alters the yearly deficit by $25 billion.)[Ref. 96]
C. DEFICITS AND ECONOMIC CONSEQUENCES
Discussing the effects of the deficits on the economy,
Rudolph Penner, the Director of the Congressional Budget
Office [Ref. 971, stated in Congressional testimony that the
exact economic consequences of the current large deficits are
hard to assess because the ratio of the deficit to GNP is
far higher for a sustained period than any period since
World War II. Penner explained that since the policy varia-
bles are outside of the range of historical experience, analysts
cannot assume with confidence that empirical relationships
Testimated on the basis of past data will remain relevant to
analyses of the current situation. Penner's viewpoint was
further expressed in a recent CBO study on the deficit issue
71B9
which reported that "the government is on a course for which
our country's history provides no charts" [Ref. 98].
While controversy exists regarding the exact magnitude of
the adverse economic consequences of the budget deficits,
there is general agreement by many including the CBO, that
if the large budget deficits persist, the long run detrimental
effects could be significant. One of the nation's leading
conservative economists, Martin Feldstein [Ref. 991, has
written that continued large deficits will mean a slower rate
of economic growth and a lowered standard of living. Feldstein
' explains that the key to raising living standards is invest-
0ment. The higher productivity that results from investments
in new factories, machinery and equipment permits the non-
inflationary increases in wages and salaries that enable
employees to afford a higher standard of living. In Feldstein's
opinion, large budget deficits will undermine such investment
N> increases because they require the government to borrow funds
that would otherwise be available to finance investments in
.. plant and equipment. This phnomenon has introduced a new
economic buzzword called "crowding-out." Crowding out as
.described by U.S. Representative Geraldine Ferraro [Ref. 1001
occurs when federal borrowing absorbs so much of the available
credit that private investment is adversely affected, either
by higher interest rates or the lack of funds to borrow.
Over time this would have significant effects on the size of
the private capital stock, and as a consequence, productivity,
the source of rising living standards, would begin to fall.
72
One CBO study [Ref. 101] noted that the crowding out of
private investment could be mitigated and even eliminated by
inflows from international capital markets. This observation
• - by the CBO has in fact already occurred. Feldstein [Ref. 1021
explains that the government borrowing to finance the deficit
has resulted in high interest rates in this country, which in
turn have attracted funds to the U.S. from abroad, thus adding
to the pool of funds available to finance desired private
investment. He notes that capital inflow from abroad will.
be enough to offset half of the government's borrowing needs
for fiscal year 1985. He warns, however, that the current
level of capital inflow cannot be sustained. Even with high
interest rates, foreign investors will eventually become
saturated with dollar securities. When this happens, invest-
ment in the U.S. will decline due to the crowding out effect.
Van de Water and Ruffin [Ref. 1031, Chief and Senior CBO
analysts, agree with Feldstein and further warn that "While
this large volume of borrowing from abroad allows the U.S.
to maintain a higher rate of investment, it gives foreigners
claim to the fruits of that investment and makes the U.S.
economy hostage to the confidence of foreign investors."
Large budget deficits have also signficiantly contributed
to a sharply fallen U.S. balance of trade account. The
account position declined from a deficit of about $42 billion
in 1983 to a deficit of over $100 billion for 1984 [Ref. 104].
Rivlin [Ref. 105] has suggested that since high interest rates
73
I
%
%
have increased the demand of U.S. dollars on foreign markets,
the exchange value of the dollar has risen sharply in the last
several years. This has had the effect of making U.S. exports
more expensive for foreigners and foreign goods and services
cheaper for Americans. Consequently, output and employment in
industries facing foreign competition have suffered. In
response to this situation increased calls for trade protec-
tion and other types of market intervention are being voiced
by the American work force.
A third area of grave concern among budget analysts is
the fact that the interest payments required to service the
9 deficits have soared. During the past ten years, net interest
A costs have grown from 23 billion dollars to about 130 billion,
or expressed as a percent of total budget outlays, from 7.0
.. percent in 1975 to 13.7 percent in 1985. By 1990, if revenue
and spending patterns remain unchanged, the Congressional
Budget Office has predicted that interest expense will reach
230 billion dollars or 16.6 percent of total outlays. As
the fastest growing segment of the federal budget, interest
outlays are consuming an increasing fraction of taxpayers
dollars at the expense of other spending priorities. [Ref. 1061
D. FEDERAL BUDGETARY OUTLAYS
1 . General
The years from 1960 to 1980 witnessed a dramatic decline
in spending for national defense as a proportion of total
74
*'*. * , ~ . .~
: v ,.-, v'- .':. ,,". . LN '.',.i-' ".i'.' -',-".-:.[,.i- .'-' ':-"'' - Y ,-' -_"-_ ',.'"-'', i:.,.'-' ->4-'. . ...
p, budget outlays. The significant shift in the composition
of federal expenditures primarily resulted from the combina-
tion of the anti-Vietname War movement that persisted in the
".. country and the very rapid growth of social spending programs.
In the mid 1960's, President Johnson's "Great Society" pro-
grams such as medicare, medicade, and federal aid to education
grew substantially. In the 1970's, additional non-defense
spending growth came in the form of income security program
increases, such as social security benefits, supplemental
security income, and food stamps. An important implication
of this spending trend was that as the percentage of total
budget outlays for these open-ended entitlement programs
increased, the amount of federal budget outlays classified as
controllable and made available to Congress for budgetary
deficit reduction action actually decreased. [Ref. 107]
.? ~Under President Reagan, a reversal in the composition
of federal budgetary outlays has occurred resulting in a
reduced level of spending for non-defense programs and an
* .increased level of spending for national defense. Through
hard fought legislative action, the Administration has been
successful in eliminating, and/or greatly reducing benefit
levels for many social programs. This redirection of federal
expenditures reflects the Reagan Administration's commitment
to reduce the burden of government domestic spending while
improving the nation's military forces. Though the current
levels of defense spending have substantially increased
75
-p.%
-4.4. . .p.
under President Reagan, they still remain lower as a percent
'of total budget outlays as compared to the defense budgets
of the 1960's. However, the public's mounting concern over
the growing size and resulting adverse economic consequences
of the federal deficits has resulted in the Administration's
defense budget requests becoming increasingly vulnerable to
Congressional cuts.
In order to better understand the issues in the defense
spending debate pertaining to President Reagan's defense
buildup and the current budget deficits, a review of the
effect that budget controllability has on federal outlay
composition, and a comparison of budgetary trends in defense
and non-defense federal spending over a long time horizon are
necessary.
2. Budget Outlay Controllability
As defined by Lance T. Leloup [Ref. 1081 in his book
Budgetary Politics, federal spending is classified as uncon-
trollable if it is mandated under current law or by a previous
obligation. This means that Congressional legislation, not
the President's budget or an appropriation bill, must be
changed in order to alter the composition of budget outlays
falling into this category.
The purpose of categorizing budget outlays in terms
of controllable or noncontrollable is to provide budget
users with information about the relative ease or difficulty
- in implementing budget reductions in order to change the
76
4-.
magnitude of federal outlays. Obviously, in the long run all
federal spending is ultimately controllable. However, the
nature or degree of controllability differs significantly
between budget programs. For example, it would be very diffi-
cult to imagine the government defaulting on the national
debt, halting all long term projects, or eliminating all
government pensions. Uncontrollable programs would include
the interest on the national debt, public housing loans, multi-
year contracts and obligations, entitlement programs and
payments to states and individuals. Controllable portions
of the federal budget include salaries and employee benefits,
general operating expenses, research and new programs. [Ref.
1091
A review of the relative controllability of federal
budget outlays over the past twenty years indicates that the
growth in total federal spending during this period is almost
completely attributable to growth in uncontrollable items.
From Table 11, it can be seen that in 1967, outlays classified
as uncontrollable comprised 57 percent of total outlays. By
1986, uncontrollable spending will have increased by 35
percent, comprising approximately 77 percent of the total
budget outlays. During this same period, controllable spending
comprising 47 percent of total budget outlays in 1967, will
have declined by 45 percent, comprising only 26 percent of
total budget outlays in 1986.
The significant growth in uncontrollable spending has
been the result of many factors. As the largest component of
4.7
4-.
TABLE 11
CONTROLLABILITY OF BUDGET OUTLAYS(By fiscal year, as a percent of total outlays)
RELATIVELY RELATIVELY OTHERYEAR UNCONTROLLABLE OUTLAYS CONTROLLABLE OUTLAYS OUTLAY
1967 58.0 47.3 -4.2
1968 58.0 46.0 -4.0
1969 61.1 43.1 -4.1
1970 61.5 42.9 -4.3
1971 63.0 41.3 -4.3
1972 63.0 41.1 -4.0
1973 66.9 37.0 -3.8
I1974 68.4 34.8 -3.2
1975 66.9 34.1 -1.0
1976 67.3 33.9 -1.2
1977 67.2 33.7 -1.0
1978 68.7 32.0 -0.6
1979 68.6 31.8 -0.3
1980 70.0 30.2 -0.3
1981 70.2 29.3 0.5
1982 72.6 27.7 -0.4
1983 73.4 28.0 -1.4
1984 73.3 28.5 -1.8
1985 (est) 72.6 28.9 -1.5
1986 (est) 76.6 26.2 -2.7
Source: Historical Tables, Budget of the U.S.- Government 1985, Section 8, p. 8.1(1)-Lag 8.1(8)
* 78
uncontrollable spending, entitlement programs commit the
federal government to pay certain benefits to individuals if
they are eligible. Depending upon the program, eligibility
requirements are determined by the federal government or by
the individual states. Many of these programs are open ended
with outlays increasing as much as necessary to pay persons
who are entitled to receive benefits. Additionally, automatic
spending increases over the years due to built-in cost of
living escalators designed to increase both benefit levels and
coverage, have allowed these programs to further increase
uncontrollable spending. Other contributing programs such as
the rising interest cost to service the national debt, and the
federal/state matching of funds for various programs have in-
creased the level of uncontrollable spending. [Ref. 1101
The majority of federal spending programs classified
as uncontrollable have two very important aspects in common;
* 1) Many of these programs automatically increase outlays with-
out the need for legislative action, thus increasing the uncon-
trollable portion of the federal budget, and 2) Once implemented,
these programs are politically very difficult to cut back.
This second aspect of uncontrollable spending programs has had
a significant effect on the measures introduced by Congress to
reduce the current levels of federal deficits.
Deficit reduction measures having the fastest impact
in the effort to reduce the deficits are generally comprised
of spending cuts made from the controllable portion of the
79
I? .%
V3
federal budget. Unlike the uncontrollable portion of the
budget, legislative action is not required to impose a reduced
level of spending. This has made the defense budget especially
- vulnerable for spending cuts. Defense outlays make up the
largest segment of the federal budget classified as controlla-
ble because of the high proportion of outlays marked for the
salaries and benefits of military and civilian defense depart-
ment employees, and large annual general operating outlays
v [Ref. 111]. Since the majority of federal budgetary outlays
classified as controllable are in the area of national defense,
the defense department has become the prime target for major
budget cuts in the effort to reduce the federal deficits.
3. Trends in Defense and Non-Defense Outlays
The composition of federal spending has changed con-
siderably over the past twenty years. These changes reflect
the desires of the American public as well as the effects of
the budget controllability concept on the total outlays of the
federal budget. A comparison of trends in defense and non-
defense federal spending over this period as shown in Table 12,
clearly shows the growth of non-defense outlays at the expense
of outlays for national defense. Between 1967 and 1986, defense
outlays are expected to decrease as a percent of total budget
outlays by 35 percent; non-defense outlays for individuals and
grants to state and local governments to increase by over 50
percent, and the fastest growing component of the federal
budget, net interest will grow by 135 percent.
80
TABLE 12
DEFENSE AND NON-DEFENSE OUTLAY TRENDS(By fiscal year, as a percent of budget outlays)
NON-DEFENSE OUTLAYSNATIONAL INDIVIDUALS AND NET
YEAR DEFENSE LOCAL/STATE GOVT INTEREST OTHER
1967 45.4 33.8 6.5 14.3
1968 46.0 34.8 6.2 13.0
1969 44.9 38.2 6.9 10.0
1970 41.8 40.9 7.3 10.0
1971 37.5 46.6 7.1 8.8
1972 34.3 49.2 6.7 9.8
1973 31.2 53.9 7.1 7.8
1974 29.5 55.3 8.0 7.2
1975 26.0 56.2 7.0 10.8
1976 24.1 59.0 7.2 9.7
1977 23.8 59.3 7.3 9.6
1978 22.8 57.7 7.7 11.8
1979 23.1 57.3 8.5 10.8
1980 22.7 57.1 8.9 11.3
1981 23.2 56.2 10.1 10.5
1982 24.9 54.5 11.4 9.2
1983 26.0 55.2 11.1 7.7
1984 26.0 55.2 11.1 7.7
1985 (est)26.5 50.8 13.6 9.1
1986 (est)29.3 51.0 14.6 5.11967-1986% change -35.4 +50.8 +135.4 -65.0
Source: Historical Tables, Budget of the U.S. Government1985, Section 6, p. 6.2(l)-6.2(8)
81
U7
In 1984, 55 percent of all Federal government outlays
were transfer payments to individuals or State and local
governments. The speed at which this segment of the budget
has grown over the past years reflects the entitlement charac-
ter of many of the programs introduced or modified in the 1960's
and 1970's. Some of the programs included in this category are
social security, medicaid, medicare, food stamps, federal
employee pensions, supplemental security income, unemployment
insurance, farm price supports, general revenue sharing,
revolving funds, and a large number of smaller trust funds
[Ref. 1121. Congressional legislation did not appropriate a
• fixed amount of money for most of these programs, but only
established rules that define benefit levels and eligibility.
As a result, funding for many of these programs has become
uncontrollable, with payments being required by public law
to be made available to those qualifying for program benefits.
The members of the Congress who enacted these programs
and the analysts who advised them frequently failed to esti-
.. mate the future cost of the programs that they were creating.
As an example, Medicare was introduced in 1966 and immedi-
- - ately experienced costs that were far greater than had been
generally predicted. In 1966, medicare outlays were Jess than
$0.1 billion. Ten years later in i976, the program's outlays
had grown to $17.8 billion. The program's costs are expected
to growt to $76 billion dollars by 1986, and further jump to
$119 billion by 1990. At this rate of growth, the program's
82
N.
costs will have increased over 100,000 percent in just 25
years. [Ref. 1131
The Reagan Administration's legislative victories in
reducing the growth of many social program benefits while
successfully achieving Congressional approval for significant
increases in defense spending have dramatically altered the
composition of Federal budget outlays. After experiencing a
50 percent decrease in the percentage of budget outlays for
defense spending from 1967 to 1980, the percentage of total
budget outlays for national defense spending has increased from
1980 to 1984 by 14 percent. Likewise, transfer payments to
individuals or State and local governments decreased from 1980
to 1984 by 3 percent after experiencing an increase of 69 per-
cent from 1967 to 1980. This reversal in the composition of
federal budget outlays is expected to continue. From 1984
to 1986, it is projected that defense spending will increase
an additional 12 percent and that social spending programs
will decrease by another 7 percent.
The comparison of trends in defense and non-defense
federal spending over the 1967-1981 time frame clearly demon-
strates that it is the tremendous growth in non-defense spending
that has significantly contributed to the Federal deficits
and not the recent increases in defense spending. As Defense
Secretary Weinberger IRef. 114] recently stated in a television
interview, "The real cause of the deficit of the 1980's is
the overspending on domestic programs during the 1970's. Real
83
spending on those programs more than doubled during that
decade, while defense spending fell by 20 percent."
E. THE CALL FOR DEFENSE CUTS TO REDUCE DEFICITS
'1.. The increases in defense spending during President Reagan's
first term in office, were initiated in response to the inade-
quate state of readiness in the nation's Armed Forces as con-
firmed during the SALT II hearings in 1979. Feeling that
defense had been dangeously weakened by a decade of neglect,
President Reagan with the overwhelming support of the American
public, embarked this country on a plan to restore America's
defenses. Four years later with the Reagan rearmament program
far from complete, the prospect of continuing high federal
deficits has resulted in calls to reduce the level of defense
spending. Reagan's defense budgets have increasingly come
under attack by those who say that domestic spending cuts are
not possible unless defense is cut too, or that the defense
department has not contributed its fair share to deficit
reductions.
There is no question of the fact that the size of the federal
deficits must decline. However, any deficit reduction measures
calling for decreases in defense spending must be challenged.
The defense budgets are driven by external threats to the
nation's national security and should not be used as a fiscal
policy tool. Past defense budget cuts during the 1970's re-
sulted in the erosion of America's Armed Forces which signifi-
cantly jeopardized world peace as the Soviet Union increasingly
84
tested its new-found military superiority. Additionally,
history has shown that the Soviet Union did not take advantage
of the reductions in U.S. defense spending to slow the pace
of their arms buildup, nor should they be expected to do so
in the future. As Secretary Weinberger has stated:
The Soviets will be watching, and will continue to watch,to see whether the United States will again shortchangedefense as we did in the 1970's . . . whether we willreturn to the days of a hollow army; of aging aircraftthat could not fly for lack of maintenance; of shipsthat either had to put to sea without sufficient crewsor ammunition, or remain tied up uselessly at theirdocks . . . to the days when we were not ready to respondin an emergency . . . or even to provide enough suppliesto last for more than just a few days in any conflictthat might be forced upon us. [Ref. 1151
Responding to those who advocate the popular viewpoint that
the defense department must absorb its fair share of budget
cuts, well-known columnist and past Chairman of the Council
o. of Economic Advisors under Presidents Nixon andFord, Herbert
, - Stein [Ref. 1161, has suggested that this philosophy must not
include the defense department. Stein argues that the defense
programs are not for the benefit of a specific section of the
population in the same way that the agriculture program is for
the benefit of farmers or the student loan program is for
students; but instead are for the benefit of this generation
and future generations of Americans. The real question of
fairness in this debate as posed by Stein is "whether it is
fair to risk the lives, fortunes and freedom of future genera-
tions in order to raise the consumption level of this generation
by two percentage points or so."
85
[ ,. ...
From a purely economic standpoint, DoD sponsored research
[Ref. 117] shows that cuts in defense spending would not
translate into one-for-one reductions in federal deficits.
This is because much of the defense department's outlays come
back to the government in the form of taxes on income generated
by a higher level of economic activity. It was found that
only about fifty cents of each dollar cut from the defense
budget would show up as a reduction in the deficit. This
relationship results from two reasons: 1) As previously stated,
the country would lose tax revenues from the workers displaced
as a result of spending cuts or a defense freeze, and 2) Since
many of the unemployed workeis would not find new jobs right
away, the uncontrollable costs associated with unemployment
would go up.
-It has also been argued that defense budget cuts initiated
as a short run deficit reduction measure in actuality, tend
to increase future defense cost. David S.C. Chu [Ref. 118]
testifying before a Congressional Task Force on Economics and
Growth, explained that when past defense reductions were required,
the defense department was forced to postpone the start of new
programs or stretch out existing ones. Chu states that in
either case, reductions in outlays come at the expense of
increased spending in future years. Additionally, when programs
are stretched, the total defense costs are increased. Withfewer units purchased each year, unit costs rise, and, ultimately,
_[ total spending levels.
86
WO11
F. SUMMARY
The popular idea that defense spending consumes a majority
of total federal budget outlays, and that it is the principal
cause of the federal deficits resist all factual information.
Only recently has defense spending grown in relation to
spending for social programs.
After a decade of neglect, the Reagan Administration has
reversed the dangerous trends of defense cuts as experienced
in the 1970's. As a result, the world today is a safer place
with a restored balance of power existing between the two
major superpowers. In this time of high budget deficits, it
is incumbent upon the leaders of this nation to ensure that
the defense budget is not used as a fiscal tool to help reduce
a debt that has been twenty years in the making. The recent
gains in military readiness must not be allowed to deteriorate.
Current deficit reduction proposals should concentrate on
measures designed to increase revenues while seeking further
reductions in the levels of uncontrollable spending for social
programs, and not on those that will seriously jeopardize the
readiness of the nation's Armed Forces.
87
* I~~ta..aa h ~
V. CONCLUSION
A. INTRODUCTION
This chapter contains the author's general conclusions
concerning the debate over the consequences of President
Reagan's defense buildup program on the U.S. economy and its
relationship to the Federal debt. Additionally, the author
makes recommendations of areas worthy of future research in
connection with defense spending. The chapter concludes with
the author's final observations concerning President Reagan's
rearmament plan.
B. GENERAL CONCLUSIONS
In analyzing the effects of the increased levels of defense
spending on the economy resulting from President Reagan's
V defense buildup for the period, fiscal years 1981 to 1985,
this study shows that the increased defense expenditures did
not burden the economy as predicted by many defense analysts.
Critics had suggested that the increases in defense spending
initiated by President Reagan would result in severe adverse
economic consequences due to the economy's inability to absorb
the sacle and pace of the President's rearmament plan. A
comparison of projected data with actual economic data for
the period under review, pertaining to the issues of inflation,0'-0 .
employment and long run economic growth, shows that the actual
88......................
economic performance achieved by the economy is contrary to
the economic performance as proposed by leading defense analysts.
The Reagan defense buildup has not increased the level of
inflation as many analysts had predicted it would. Due to the
excess industrial capacity that exists in the economy, the
inflation rate has actually declined by over 100 percent during
this period. Similarly, projections that shortages of skilled
labor and technical talent would drive up the cost of labor
did not occur. With the Reagan buildup well underway, a
-. small degree of slack exists for the areas of employment con-
sidered to be the most critical. A properly functioning, free
market system coupled with innovative changes in the work place
to include an increased use of automated machinery have eased
the labor situation. Finally, productivity as measurr i in
the business and manufacturing sectors of the economy, has
grown substantially over the recent years prior to fiscal year
1981. This increase in productivity has been attributed to
the advances in technology resulting from DoD research. The
DoD budget, large enough to afford a state-of-the-art research
funding level, has resulted in significant technological
"" improvements that have proved very valuable in civilian
production.
In reviewing the relationship between defense spending and
the Federal debt, an analysis of the composition of Federal
spending over the past twenty years shows that contrary to
public opinion, the current Federal debt is primarily a result
89
=' .. .. . . ..
of the growth in uncontrollable spending for social programs
and not increases in expenditures for national defense. This
is not to say that defense expenditures have not contributed
to the deficits, but to realize that in order to reduce the
current deficits, substantial cuts must be further made in
spending for uncontrollable social programs via legislative
changes to levels of entitlements.
C. RECOMMENDATIONS OF AREAS FOR FURTHER RESEARCH
The subject of defense spending presents many possible
topics worthy of additional research. Several related topics
to the research presented in this study are recommended.
One area for study would be to expand the data as presented
in Chapter IV. With the Reagan armament plan heavily weighted
towards procurement, an analysis designed to determine the
composition change of the defense budget in relation to budget
uncontrollability could be performed. The study could attempt
to determine the implications of such spending changes within
the defense budget as efforts to reduce the defense budget as
a federal deficit reduction measure intensify.
Another area of possible research would oe to determine
the impact of the FY-86 zero growth defense plan on the defense
budget. The FY-86 defense budget calls for no increase in
Pentagon outlays beyond what is necessary to match inflation.
An analysis of the required budget cuts necessary to conform
with the zero growth plan could be performed. The study could
90
• -
take the form of an attempt to answer the question; Were
the budget cuts balanced between accounts, or as in past
years, did training, operations, maintenance and spare parts
accounts receive most of the cuts?
A final topic for further study would be to attempt to
determine the effect on national security of cuts made in the
President's defense budget request as a deficit reduction
measure. An analysis of the gap between the original Reagan
Administration five year defense plan and the actual defense
budgets as approved by the Congress, could include a consider-
ation of the impacts of budget cuts on military readiness and
force structure, and their implications for national security.
D. SUMMARY
The choice of an appropriate level of defense spending
should be based upon the commitments made by the Government of
the United States to its allies and the threats to national
security, not by domestic politics. However, the fact is that
A the shifting cycles of defense spending over the past twenty
years have borne little relationship to the nation's real
security interests.
The American public first elected President Reagan in
1980, and after witnessing a decade of neglect in America's
-Armed Forces, gave him the mandate to restore America's
defenses. Now four years and a trillion dollars later, the
public consensus has weakened. In 1985, the defense spending
91
debates in Congress are no longer tied to international
threats but are heavily influenced by the size of the Federal
debt. The Congress, with the support of the American public
is forcing the Pentagon to take its fair share of budget cuts
by imposing a zero growth budget for the defense department
for fiscal year 1986. These reductions in defense spending
have halted the Reagan defense plan even though the Soviet
Union continues with their force modernization program.
As the principal protector of the Free World, the United
States should make defense spending decisions based on ex-
ternal threats and not by the desire to have a balanced budget
since the price of freedom, whether measured in terms of human
life or in dollars, is immeasurable. The security of the
United States and the freedom of future generations demands no
less. This study shows that the deficit issue is a complex
situation, primarily influenced by uncontrollable social spend-
ing and not by defense expenditures as many believe. Unless
President Reagan is allowed to complete the defense buildup
as planned, the United States will revert to the dangerous
, times when all America could do was to hope its military was
not required to be called upon. Finally, current defense budget
decisions should not be influenced unduly by the effects of
defense spending on the economy, since data show that the
economy is able to absorb President Reagan's defense buildup
program without experiencing adverse consequences.
92
[,j" %,.4t
' < ' 9
LIST OF REFERENCES
1. Gansler, J.S., The Defense Industry, p. 14, MIT Press,1980.
2. Muravchik, J., "The Senate and National Security," TheWashington Papers, p. 68, Sage Publications, 1980.
3. "Public Calls For Defense Cuts," Gallup Report, ReportNo. 234, p. 3, March 1985.
4. Degrasse, R.W. Jr., Military Expansion Economic Declinep. 35, M.E. Sharpe Inc., 1983.
5. Olvey, L.D., Leonard, H.A., Arlinghaus, B.E., IndustrialCapacity and Defense Spending, p. 135, Lexington Books,1983.
6. United States Congressional Budget Office, Defense Spend-ing and The Economy, p. 5, United States GovernmentPrinting Office, 1983.
7. Thurow, L., "How to Wreck the Economy," The New YorkReview of Books, Vol. 28, pp. 3-5, 14 May 1981.
8. United States Congressional Budget Office, Defense Spend-ing and The Economy, p. 6.
9. "Proposed Increase in Future Spending For National Defense,"Congressional Digest, November 1979, pp. 257,287, UnitedStates Government Printing Office, 1979.
10. United States Congressional Budget Office, Defense Spendingand The Economy p. 6.
11. Weinberger, C.W., Report of Secretary of Defense to theCongress on the FY 1983 Budget, p. 1-9, U.S. GovernmentPrinting Office, 1982.
12. United States Congressional Budget Office, Defense Spendingand The Economy, pp. 1-72.
13. Puritano, Vincent, Korb, Lawrence, "Streamlining PPBS toBetter Manage National Defense," Public AdministrationReview, Vol. 41, No. 5, p. 570 (Sept/Oct 1981).
14. Hobkirk, M.D., The Politics of Defence Budgeting, p. 29,g National Defense University Press, 1983.
93
15. Ibid.
16. Puritano, Korb, "Streamlining-PPBS to Better ManageNational Defense," p. 570.
17. Naval Postgraduate School, Practical ComptrollershipCourse, textbook, p. A-9, July 1983.
18. Puritano, Korb, "Streamlining PPBS to Better Manage
National Defense," p. 570.
19. Weinberger, C.W., Report of Secretary of Defense to the
Congress on the FY 1983 Budget, p. 1-46.
20. Anthony, R.N., Herzlinger, R.E., Management Control inNon-Profit Organizations, p. 271, Irwin, 1975.
21. Thompson, W.S., and Others, National Security in the1980s From Weakness to Strength, p. 13, Institute forContemporary Studies, 1980.
22. Collender, S.E., The Guide To The Federal Budget, p. 160,Urban Institute Press, 1985.
23. Blackman, R.V., Jane's Fighting Ships, p. 352, Jane'sFighting Ships Publishing, 1961.
.24. Korb, L.J., "The FY 1981-85 Defense Program: Is aTrillion Dollars Enough?" Naval War College Review,p. 4, (Jan/Feb 1980).
25. Ibid.
26. Ibid.
27. Muravchic, J., "The Senate and National Security,"pp. 5-86.
28. Gansler, L.S., The Defense Industry, p. 22.
29. Korb, L.J., "The FY 1981-85 Defense Program: Is aTrillion Dollars Enough?" p. 5.
F 30. Ibid.
31. Muravchic, J., "The Senate and National Security," p. 78.
32. Ibid., p. 79.I 33. Ibid., p. 6.
94
.4~' - h4
34. Hitch, C.J., McKean, R.N., The Economics of Defense inthe Nuclear Age, p. 31, Harvard University Press, 1978.
35. U.S. Department of Defense, Joint Chiefs of Staff,United States Military Posture FY 1986, p. 1, GovernmentPrinting Office, 1985.
36. U.S. Department of Defense, Soviet Military Power 1984,p. 5, Government Printing Office, 1984.
37. Weinberger, C.W., Report of Secretary of Defense to theCongress on the FY 1983 Budget, p. 11-4.
38. Holloway, D., The Soviet Union and The Arms Race, p. 115,Yale University Press, 1984.
39. Cobb, T.W., "The Future of the Soviet Defense Burden:The Political Economy of Contemporary Soviet SecurityPolicy," Naval War College Review, Vol. XXXIV, p. 35,(Jul/Aug 1981).
40. Ibid.
41. Holloway, D., The Soviet Union and The Arms Race, p. 116.
42. Cobb, T.W., "The Future of the Soviet Defense Burden:The Political Economy of Contemporary Soviet SecurityPolicy," p. 35.
43. Ibid.
44. U.S. Department of Defense, Defense 85, p. 4, AmericanForces Information Service, March 1985.
45. Vessey, J.W., "The Unrelenting Growth of Soviet MilitaryPower," Vital Speeches of the Day, Vol. XLIX, pp. 456-459, May 1983.
46. U.S. Department of Defense, Defense 85, p. 4, March 1985.
47. Reagan, R., Peace and National Security, Address to theNation, Washington, D.C., March 23, 1983.
48. Vessey, J.W., "The Unrelenting Growth of Soviet MilitaryPower," p. 457.
49. U.S. Department of Defense, Soviet Military Power 1984,pp. 27-31.
50. U.S. Department of Defense, Defense 85, p. 5, AmericanForces Information Service, ApriA 1985.
95
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51. Reagan, R., Peace and National Security.
52. Shultz, G., The Importance of the MX PeacekeeperMissile,Statement before the Senate Armed Services Committee,Washington, D.C., February 26, 1985.
53. Reagan, R., Peace and National Security.
54. Olvey, L.D., Leonard, H.A., Arlinghaus, B.E., IndustrialCapacity and Defense Spending, p. 135.
55. DeGrasse, R.W. Jr., Military Expansion Economic Decline,p. 109.
56. Webster's New Collegiate Dictionary, Eighth Edition, 1977,p. 591.
57. DeGrasse, R.W. Jr., Military Expansion Economic Decline,p. 109.
58. U.S. House of Representatives, Ninety-fifth Congress,Consumer Price Index For All--Urban Consumers, May 10,1978, p. 27, Government Printing Office, Washington, D.C.
59. United States Congressional Budget Office, DefenseSpending and The Economy, p. 4.
60. Gansler, J.S., The Defense Industry, p. 15.
61. Schultze, C., "Economic Effects of the Defense Budget,"
2 The Brookings Bulletin, Vol. 18, No. 2, p. 3, Fall 1981.
62. Council of Economic Advisors, Ecomomic Indicators, July1985, p. 24, U.S. Government Printing Office, WashingtonD.C., 1985.
63. U.S. House of Representatives, Ninety-Ninth Congress,Defense And The Deficit: A Review Of Defense SpendingAnd Its Relationship To National Security, March 28,1985, p. 2, U.S. Government Printing Office, WashingtonD.C., 1985.
64. U.S. Department of Commerce, Sectoral Implications OfDefense Expenditures, August 1982, pp. 1-19, U.S.Government Printing Office, Washington, D.C., 1982.
65. U.S. Department of Commerce, Sectoral Implications OfDefense Expenditures, p. 8.
66. Schroeder, W.A., "The Defense Budget Debate for 1985,"Amphibious Warfare Review, Vol. 3, No. 1, p. 118, August1985.
96
67. Vitaliano, D.F., "Defense Spending and Inflation: AnEmpirical Analysis," The Quarterly Review of Economicsand Business, Vol. 24, No. 1, pp. 22-32, Spring 1984.
68. DeGrasse, R.W. Jr., Military Expansion Economic Decline,p. 6.
69. Office of Management and Budget, Historical Tables Budgetof the United States Government, Fiscal Year 1986,pp. 6.(7)-6.1(8), U.S. Government Printing Office,Washington, D.C., 1985.
70. Olvey, L.D., Leonard, H.A., Arlinghaus, B.E., Industrial
Capacity and Defense Spending, pp. 134-137.
71. Ibid., p. 138.
72. United States Congressional Budget Office, DefenseSpending and The Economy, p. 26.
73. U.S. House of Representatives, Ninety-Eighth Congress,Defense And The Economy: The Issues Of Jobs, Inflationand Longrun Growth, December 7-9, 1983,-p. 107, U.S.Government Printing Office, Washington, D.C., 1984.
74. Ibid., p. 137.
75. United States Congressional Budget Office, DefenseSpending and The Economy, p. 43.
76. U.S. House of Representatives, Ninety-Eightin, Congress,Defense And The Economy: The Issues Of Jobs, Inflationand Longrun Growth, p. 8.
77. Ibid., p. 97.
78. Ibid.
79. Ibid., p. 75.
80. Ibid., p. 32.
81. DeGrasse, R.W. Jr., Military Expansion Economic Decline,p. 77.
82. Ibid.
83. Ibid.
84. Ibid.
97
85. Reagan, R., Economic Report of The President, February1985, p. 4, U.S. Government Printing Office, Washington,D.C., 1985.
86. "Americans Vote On Deficit Reduction Measures," GallupReport, n. 237, p. 2, June 1985.
87. Rivlin, A.M., "There is No Painless Way To Reduce ALarge Deficit," The Brookings Review, p. 6, Summer 1984.
88. Eichner, A.S., "Budgeting For Peace and Growth,"Challenge, Vol. 26, No. 6, p. 9, January/February, 1984.
89. Barnard, R., "Defense Spending," Vital Speeches of theDay, Vol. LI, No. 4, pp. 103-105, December 1, 1984.
90. Van De Water, P.N., Ruffing, K.A., "Federal Deficiets,Debt and Interest Costs," Public Budgeting and Finance,Vol. 5, No. 1, pp. 54-55, Spring 1985.
91. Simon, W.E., "The Control Of Federal Spending," Vital0" Speeches Of The Day, Vol. LI, No. 12, p. 355, April 1,
1985.
92. Van De Water, P.N., Ruffing, K.A., "Federal Deficits,
Debt and Interest Costs," p. 55.
93. Greider, W., "The Education of David Stockman," TheAtlantic Monthly, p. 29, Cember 1981.
94. Reagan, R., Economic Report Of The President, February1985, pp. 26-27.
95. Russell, S.H., "On Defense and Deficits," Armed ForcesComptroller, Vol. 29, No. 4, p. 48, Fall 1984.
96. Reagan, R., Economic Report Of The President, February1983, p. 26, U.S. Government Printing Office, Washington,D.C., 1983.
97. U.S. House of Representatives, Ninety-Eighth Congress,Projected Growth of Budget Deficits, p. 44, October 26,1983, U.S. Government Printing Office, Washington, D.C.,1984.
98. United States Congressional Budget Office, Reducing TheDeficit: Spending AndRevenue Options, p. 1, February1984, U.S. Government Printing Office, Washington, D.C.,1984.
99. Feldstein, M., "How To Get The Deficit Under $100Billion," Time, pp. 48-49, 4 February 1985.
98
100. "Controversy Over The Federal Budget Deficit,"Congressional Digest, February 1984, p. 56, U.S.Government Printing Office, Washington, D.C., 1984.
101. United States Congressional Budget Office, The EconomicAnd Budget Outlook: Fiscal Years 1986-1990, p. xxv,February 1985, U.S. Government Printing Office,Washington, D.C., 1985.
102. Feldstein, M., "How To Get The Deficit Under $100Billion," pp. 48-49.
103. Van De Water, P.N., Ruffing, K.A., "Federal Deficits,Debt and Interest Cost," p. 59.
104. Reagan, R., Economic Report Of The President, February1985, p. 100.
105. Rivlin, A.M., "There is No Painless Way To Reduce ALarge Deficit," p. 5.
106. United States Congressional Budget Office, The EconomicAnd Budget Outlook: Fiscal Years 1986-1990, p. xxiii.
107. Leloup, L.T., Budgetary Politics, pp. 59-80, Kings
Court Communications Inc., 1980.
108. Ibid.
109. Ibid.
, 110. Ibid.
111. Ibid., p. 72.
112. United States Congressional Budget Office, The EconomicAnd Budget Outlook: Fiscal Years 1986-1990, p. 158.
113. Ibid., p. 165.
114. U.S. Department of Defense, Defense 85, p. 5, March1985.
115. Ibid., p. 3.
116. Stein, H., "Cutting The Lean Out Of Defense," WallStreet Journal, 27 February 1985.
117. Weinberger, C.W., Annual Report To Congress, FiscalYear 1984, p. 67, U.S. Government Printing Office,Washington, D.C., 1983.
99
118. U.S. House of Representatives, Ninety-Eighth Congress,Defense And The Economy: The Issues Of Jobs, InflationAnd Long Run Growth, p. 146.
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